When someone passes away, that person’s legal representative (estate trustee) has to file a final income tax return that includes all income earned by the deceased up to the date of death. The estate is everything that a person owns when they die, including their property and their debts. The estate trustee also advises the CRA, Service Canada, and/or Revenu Québec of the date of death and submits the appropriate documents to their offices.
If the death occurred between January 1st and October 31st, the due date is April 30th of the following year. If the death occurred between November 1st and December 31st, they are due six months after the date of death.
Importance of estate tax return
When someone passes away, in addition to regular income tax, they may have to pay tax on their assets. The estate tax return is how the estate trustee finds out and informs the CRA if the estate of the deceased owes any taxes. Like all other debts, income tax must be paid by the estate prior to any inheritance, which is called “settling the estate”. The notice of assessment for the deceased tax return is one of the documents the estate trustee requires in order to apply for a clearance certificate and distribute property from the estate.
Income Tax Due to Deemed Disposition
An item that must be included in the estate tax return is the net capital gain recognized under the deemed disposition rules of the Income Tax Act. These rules treat all capital property owned by the deceased as if it was sold immediately prior to death. So, all unrecognized capital gains and losses are triggered at that point with the net capital gain (gains less losses) that must be included in income to calculate taxes.
The Income Tax Act does contain provisions to defer the tax owing under the deemed disposition rules if the asset is left to a surviving spouse or to a special trust for a spouse (spousal trust) created by the deceased’s Will. This provision allows the spouse or the spousal trust to take ownership of the asset at the deceased’s original cost. Hence, no tax is payable until either the spouse or the spousal trust sells the asset or until the surviving spouse dies. The tax is then payable based on the asset’s increase in value at that point in time. Refer to trust taxes on our website for more information.
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