Death & Estate Taxes: Complete Guide

Tax Returns Required

Final Return (Terminal Return)

• Reports income from January 1 to date of death
• Due the later of: 6 months after death OR April 30 of following year
• Includes deemed disposition of capital property
• Final opportunity for credits and deductions

Optional Returns

In some cases, the executor can file additional returns to reduce taxes:

• Rights or things return: Amounts owed to deceased (unpaid salary, dividends declared)
• Partner/proprietor return: Business income from fiscal year-end to death
• Trust income return: If deceased was a trust beneficiary

Deemed Disposition at Death

At death, the deceased is deemed to have sold all capital property at fair market value:

Assets Subject to Deemed Disposition

• Stocks and investments
• Real estate (except principal residence)
• Business assets
• Art, jewelry, and collectibles
• Shares in private corporations

Capital Gains Calculation

FMV at death - Adjusted cost base = Capital gain

50% of capital gains are taxable as income on the final return.

Principal Residence Exemption

The deceased's principal residence can still qualify for the PRE:

• Must designate on final return
• Only one principal residence per family per year
• PRE eliminates capital gains on qualifying home
• File Form T2091 with final return

Spousal Rollover

Property left to a spouse or common-law partner can roll over tax-free:

How It Works

• Transfer at deceased's adjusted cost base
• No capital gains triggered at death
• Surviving spouse inherits the cost base
• Tax deferred until spouse sells or dies

Applies To

• RRSPs and RRIFs
• Capital property
• Eligible capital property
• Resource properties

RRSPs and RRIFs

Left to Spouse

• Transfers tax-free to spouse's RRSP or RRIF
• No income on final return
• Tax deferred until spouse withdraws

Left to Dependent Child

• Can purchase annuity to age 18
• Disabled dependent can transfer to RDSP

Left to Non-Spouse

• Full value included in deceased's final return income
• Can create substantial tax liability
• Plan ahead to minimize impact

TFSAs

• Can transfer to spouse's TFSA without using contribution room
• Growth after death is taxable if successor holder not named
• Not subject to deemed disposition
• No tax on TFSA value at death

Credits on Final Return

The final return can claim:

• Medical expenses: Expanded 24-month period
• Charitable donations: Up to 100% of net income (vs. usual 75%)
• All personal credits: Full year, not prorated
• Capital losses: Can offset any income, not just gains

Estate Tax Returns (T3)

After death, the estate may need to file T3 returns:

• Reports income earned by the estate after death
• Interest, dividends, rental income
• Capital gains on assets sold by estate
• 36-month deadline for graduated rate estate status

Graduated Rate Estate (GRE)

• Estate taxed at graduated rates (like individuals)
• Must be designated by executor
• Only one GRE per deceased
• Status lasts maximum 36 months

Probate Fees

Probate fees are provincial (not federal tax):

• Ontario: ~1.5% of estate value over $50,000
• BC: Graduated rates up to 1.4%
• Alberta: Maximum $525
• Quebec: Fixed fees (minimal)

Avoiding Probate

• Joint ownership with right of survivorship
• Named beneficiaries on RRSPs, TFSAs, insurance
• Living trusts
• Multiple wills (for private corporation shares)

Clearance Certificate

Before distributing estate assets, executors should obtain clearance certificate:

• Confirms all taxes paid
• Protects executor from personal liability
• Request using Form TX19
• CRA reviews all returns before issuing

Filing Deadlines

Planning Strategies

Before Death

• Name beneficiaries on registered accounts
• Consider spousal RRSP contributions
• Plan charitable bequests for tax benefit
• Review principal residence designation
• Consider life insurance to cover tax liability

After Death

• Assess value of electing out of rollovers
• Consider filing optional returns
• Maximize medical and charitable credits
• Review for loss carrybacks

Common Mistakes

• Missing filing deadlines: Late penalties and interest
• Not claiming PRE: Designation must be filed
• Distributing before clearance: Personal liability risk
• Forgetting optional returns: May save taxes
• Not planning RRSP beneficiaries: Can trigger large tax bill