Tax Return for Deceased Person
Tax Return for Deceased Person
Death is an inevitable part of life and at some point in time we are all affected by it. During this difficult time, we are hoping this guidance will help provide some ease from a tax perspective for those affected.
A deceased’s legal representative is the person named in the will (executor) or a person appointed to handle the estate if there’s no will or executor.
As the legal representative, it is your responsibility to:
- file all required returns for the deceased;
- ensure that all taxes owing are paid; and
- Let the beneficiaries know which of the amounts they receive from the estate are taxable.
There are many different returns that impact the deceased taxpayer and it is important to understand the difference between each.
This type of return must always be filed for a deceased person. On the final return, report all of the deceased’s income from January 1 of the year of death, up to and including the date of death.
Penalty for late-filing a final return – If you file the final return late and there is a balance owing, CRA will charge a late filing penalty. CRA will also charge you interest on both the balance owing and any penalty. The penalty is 5% of any balance owing, plus 1% of the balance owing for each full month that the return is late, to a maximum of 12 months. Even if you cannot pay the full amount owing by the due date, you can avoid this penalty by filing the return on time.
T3 Trust Income Tax and Information Return
This return is used to report income earned after the date of death.
Below are examples of type of income to report on the T3 return for the year in which you receive the income.
- Severance pay received because of death. Since this is a death benefit, up to $10,000 may be non-taxable.
- Future adjustments to severance pay regardless of when the collective agreement was signed.
- Refund of pension contributions payable because of death.
- Guaranteed minimum pension payment. This is not a death benefit.
- Deferred profit-sharing plan payment.
- Pension or retirement periodic payments.
- I.A.A.C. annuity.
- Income earned in a RRIF after annuitant dies.
- Income earned in a RRSP after annuitant dies.
- CPP or QPP death benefit, if not reported by the recipient.
In addition to the final return, you can choose to file up to three optional returns for the year of death.
Information about the deceased’s income sources will help you determine if you can file any of these optional returns. You do not report the same income on both the final and an optional return but you can claim certain credits and deductions on more than one return. By doing this, you may reduce or eliminate tax for the deceased. This is possible because you can claim certain amounts more than once, split them between returns, or claim them against specific kinds of income.
The three optional returns available for a deceased
1) Return for rights or things
Rights or things are amounts that had not been paid to the deceased at the time of his or her death and would have been included in his or her income when received had the person not died. The main rights or things are from employment and other sources
- employment income (salaries, commissions, vacation pay) owing by the employer but not payable at the time of death for a pay period that ended before the date of death, as well as retroactive payments paid pursuant to a collective agreement signed before the date of death;
- uncashed matured bond coupons;
- accumulated unpaid bond interest;
- unpaid dividends declared before the person died;
- OAS, EI and CPP benefits not yet received for a period ended before the date of death or for the month of death;
- work-in-progress if the deceased carried on a business and had elected to exclude work-in-progress when calculating income;
- retroactive payment of a disability annuity or EI benefit paid after the date of death, but to which the deceased was entitled prior to that date; and
- pension plan, RRSP or RRIF payments for the month of death that had not been received at the date of death.
If you elect to file an optional return, all rights and things have to be reported therein except those transferred to beneficiaries. Rights or things transferred to a beneficiary before the filing deadline for an optional return have to be reported by the beneficiary
2) Return for a partner or proprietor
A deceased person may have been a partner in, or the sole proprietor of, a business. The business may have a fiscal year that does not start or end on the same dates as the calendar year. If the person died after the end of the business’s fiscal period but before the end of the calendar year in which the fiscal period ended, you can file an optional return for the deceased.
If you choose not to file this optional return, report all business income on the Final return.
3) Return for income from a testamentary trust
You can file an optional return for a deceased person who received income from a testamentary trust. The trust may have a fiscal period (tax year) that does not start or end on the same dates as the calendar year. If the person died after the end of the fiscal period of the trust, but before the end of the calendar year in which the fiscal period ended, you can file an optional return for the deceased.
Note: Do not confuse this optional return for income from a testamentary trust with the ‘T3 Trust Income Tax and Information Return’. After someone dies, a will or a court order may create a trust, and the trustee, executor, or administrator may be required to file a T3 return.
Contact us for more information on optional returns.
To see a good summary on all types of returns and what type of income, deductions, and credits must be claimed on each return, visit the CRA’s link below.