Trusts, Estates & Wealth Planning


Tax Information for Estate Trustees

As an estate trustee, you are responsible for all of the tax filings and payments of the deceased, including: filing all prior year income tax returns, filing current income tax returns as they are due, filing the final (year of death) tax return, and any income taxes, penalties and interest that may be owing.

Previous Unfiled Returns

If the deceased died between January and April and had not filed an income tax return for the previous year, the previous year's income tax return is due six months following the date of death. For example, if an individual died on February 5, 2011, the unfiled return would be due August 5, 2011.

If there are other unfiled returns for past tax years, they should be filed as soon as possible, since penalties and interest may be levied on any amount owing. If the deceased was seriously ill and unable to file, it may be possible to appeal the penalties, but you should not assume that they will be waived.

T1 Terminal Return

The final income tax return, called a ‘T1 Terminal’, is filed on the same form as that used by living individuals. If the individual died between January and October and was not carrying on a business, this return is due no later than April 30th of the following year. If the deceased died in November or December, the T1 Terminal return is due six months following the date of death.

The T1 Terminal return reports the income of the deceased from January 1 to the date of death. If the deceased owned capital property (such as mutual funds or stocks) or held registered plans like RRSPs or RRIFs, there will likely be a deemed disposition on the date of death. The full amount of the registered plan and 50% of any capital gain must be included in the income of the deceased. Unless the assets are being passed to a spouse, the taxes owing in such a case can be significant.

With the T1 Terminal return, you should file a notarial copy of the Will and an original (or notarial copy) of the death certificate.

Clearance Certificate

You should not distribute estate assets until you have received at least a Notice of Assessment for the T1 Terminal return, and you have determined and dealt with all prior year tax liabilities. The safest course is to postpone distribution of any assets until you have received a Clearance Certificate up to the date of death from Canada Revenue Agency. Without a Clearance Certificate, you can be held personally liable if any additional taxes, penalties or interest arise and you are not holding sufficient estate assets to cover the amount owing. Alternatively, you can distribute some of the estate before receiving Clearance, as long as you hold back enough to be sure the taxes can be covered.

With the request for a Clearance Certificate, you should file a notarial copy of the Will and an original (or notarial copy) of the death certificate, if these have not been filed with the T1 Terminal return. You should also file a statement of the estate assets and how they have been distributed.

T3 Trust Returns and Other Returns

You may file a T3 trust return to report income received by the estate in the year or years following the date of death. If an estate has significant income and the beneficiaries have income of their own, the possible tax savings resulting from the filing of a T3 trust return may outweigh the additional cost to prepare and file a T3 trust return. Similarly, a T3 trust return will likely be required for every year that the estate is not wound up or a continuing trust exists.

You should consult with a tax accountant familiar with the taxation of estates and trusts if you are filing a T3. In consultation with the accountant, you will decide what the ‘trust year' will be. The starting date of the trust will be the date of death, but the end can be any date up to one year after the date of death. Generally, you will want to determine an end date convenient for administration purposes, calculating investment earnings, etc. Often the end date is either the month-end immediately prior to the one year anniversary of the date of death or the end of the calendar year in which the individual died, i.e., December 31st. The filing deadline for T3 trust returns is 90 days after the trust’s year end.

You should also get the advice of a tax accountant when deciding whether additional returns should be filed. For example, a so-called Rights and Things return may allow for tax savings if the deceased had certain kinds of income.

Foreign Tax Matters

If the deceased was a citizen or resident of another country, you will need to seek tax advice on potential liabilities in that other country. This is especially true if the deceased had any connection with the United States – including being the child of a U.S. citizen or holding real property in the U.S. Since the U.S. Estate Tax requirements are very far reaching, you must make sure to get good tax advice if the deceased had U.S. connections.