Death, Taxes and the CRA
As the Executor you are not only responsible to the beneficiaries, the Canada Revenue Agency (CRA) is the first and last creditor of an estate. CRA will hold you personally responsible for non-payment of any taxes if you have made distributions to the beneficiaries and there is not enough money left to pay all outstanding taxes.
Additionally, from the date you become an Executor it may take over 3 years to complete the responsibilities for tax filings and payments. How do you manage?
CRA defines an Executor as the Legal Representative for a deceased taxpayer. To establish the Legal Representative, contact CRA by phone and provide the date of death and social insurance number of the deceased. Subsequently mail a copy of the death certificate and a complete copy of the Will to the local tax office the deceased normally used to file their personal income tax return.
Tax Credits and Benefits
Once you have been established as the Legal Representative, the multiple responsibilities start. First an assessment of the status of any tax credits or benefits the individual was receiving must be performed to determine the right to continued payment or alternately repayment.
Personal Income Taxes
The second responsibility of the Legal Representative is to confirm that the individual was up-to-date in filing their personal income tax returns. Locating copies of filed returns can be difficult if the person has recently downsized their possessions, kept poor records or maintains only digital versions that were e-filed. However, once your role as the Legal Representative has been established with CRA, you can contact them to determine if the filings are up-to-date. If the deceased was not up to date the Legal Representative is responsible for filing the income tax returns for all missing years.
If the tax return for the most recent tax year was being prepared when the person passes away, the Legal Representative has 6 months from the date of death to complete and file that return. Payment of any balance owing is still due by April 30th.
The third responsibility is to file the final personal income tax return for the period from January 1st until the date of death. The deadlines for filing and payment are dependent on the date of death and whether the individual or their spouse was carrying on a business. Note that multiple returns can be filed depending on the income of the deceased. A tax specialist can assist in understanding the various deadlines and any optional returns that can be filed.
Depending on circumstances, payment of tax liabilities may occur before the probate process is completed. The Executor should contact the financial institution holding the assets of the deceased to determine if payment can be made from those accounts. If not, interest will accrue until payment is made.
Tax Clearance for Personal Income Taxes
Once all personal income tax returns are filed, the Legal Representative must request a tax clearance certificate. This is the final opportunity for CRA to determine that all personal income taxes have been assessed and paid.
Estate Income Taxes
The final responsibility is to report and pay taxes on any income earned by the estate. After the date of death all income earned on assets must be reported by the estate through a Trust Income Tax Return (T3). This includes all investment income earned on the assets of the estate.
Establishing the year-end of a trust other than December 31st can be considered if there are tax advantages to doing so. Offsetting the benefit will be the cost of additional accounting to reconcile revenue between the trust’s tax years and revenue reported by financial institutions on T5s etc. each calendar year. A Legal Representative should seek professional tax advice before undertaking such a strategy.
Once all assets are disposed of the Final Trust Return can be filed.
Tax Clearance for Estate Income Taxes
Again, the Legal Representative should file for a tax clearance certificate.
Distributions from the Estate
Distribution of the residual assets of the estate should not be made prior to receiving the tax clearance certificate. If the Executor has distributed funds and CRA determines that there are still taxes and perhaps interest and penalties owing the Legal Representative will be personally responsible for the amount due if there are no funds available in the estate.
TIMING – So how does all of this add up to 3 years?
The example below assumes the individual passes away on February 28, 2014 and there are no testamentary trusts established by the Will.
TIMING – Personal Income taxes
March 2014 – Contact CRA and advise them of the date of death and file all paperwork requested by CRA to establish yourself as the Legal Representative. Once the date of death is recorded by CRA their systems will assess the status of any tax credits, such as HST, and tax benefits such as the Universal Child Care Tax Benefit and advise if any repayments are required.
April 30, 2014 – Deadline for payment of outstanding balances to CRA for 2013 tax return.
Summer 2014 – Confirmation of your appointment as the Legal Representative will be received. Contact CRA to determine if the individual has filed all of their required income tax returns for past years.
August 31, 2014 – This is the last date for filing the deceased’s 2013 personal income tax return (6 months after date of death).
Fall 2014 – Receive the Notice of Assessment for the 2013 tax year and determine if a Notice of Objection is required for any items in dispute.
March 2015 – Receive all of the relevant tax information for the personal taxation year of 2014. Split the income reported between the period before death and afterwards. The ease of this is dependent on the financial records maintained by the deceased. File the Final return manually for income earned prior to passing. It cannot be filed electronically.
April 2015 – Deadline for filing the Final return and remitting any balance owing.
July 2015 – Receive a Notice of Assessment for the final tax return. Determine if a Notice of Objection is required for any items in dispute.
August 2015 – Request a tax clearance for the deceased’s personal income taxes. This assumes that all prior year tax returns have been filed and paid. It also assumes that there are no issues with the final return that require a Notice of Objection to be filed and resolved.
Undetermined date – There is currently a backlog in the CRA department reviewing requests for Tax Clearance certificates. Based on personal experience it could be up to 6 months after the request to receive clearance. However this example assumes that clearance is given during the period the Executor is filing Trust Income Tax Returns for the estate.
TIMING – Estate Taxes
Financial Institutions require a will to be probated prior to transferring assets in the individual’s name to their estate. In the meantime assets in their safekeeping will continue to earn income as established by the deceased. Hence it is inevitable that the estate will need to file at least one and probably more tax returns for the estate.
December 2014 – Year end selection
The Executor can select a year-end for filing the first estate return up to the day before the first anniversary of the date of death. A tax specialist can recommend alternate dates if the type of income being earned warrants selecting an alternate date.
In this example it is assumed that December 31st is selected.
March 31, 2015 – Trust returns (T3) need to be filed within 90 days of the year-end selected for the estate. This return is filed manually with the Taxation Centre in Ottawa.
July 2015 – The current CRA standard for issuing a Notice of Assessment for a T3 is 16 weeks.
March 2015 – Assuming all assets are disposed of prior to December 31, 2015 and the estate will be holding only cash awaiting distribution, the final trust return can be filed.
July 2016 – Receipt of Notice of Assessment for the final T3 filed (16 weeks after submitting return).
August 2016 – Request a tax clearance for the estate income taxes. This assumes that all prior year tax returns have been filed and paid. It also assumes that there are no issues with the final return that require a Notice of Objection to be filed and resolved.
Undetermined date – There is currently a backlog in the CRA department responsible for Tax Clearance Certificates. Based on personal experience it could be up to 6 months after the request for the clearance.
In this example we’ll assume the clearance certificate is received in 6 months or February 2017.
The elapsed time for this example is February 2014 to February 2017 or 3 years. Factors that may increase the amount of time:
– The state of the deceased’s financial affairs and documentation.
– Need to obtain a probated will to gain access to detailed financial information.
– Ability to access digital financial information of the deceased if they do not have paper files.
– Need to file prior years’ returns not previously completed by the individual.
– Delays in moving assets to the estate result in delays liquidating them and hence Estate Trust returns must be filed for additional years.
– Increase in CRA service delivery times for assessing trust returns or issuing tax clearance certificates.
– Issues in obtaining tax clearance certificates for either the personal income taxes or estate taxes.
– One or more testamentary trusts are established for minor children or other purposes. The Legal Representative’s responsibilities will continue until those trusts are wound-up.
Accepting Executor responsibilities requires time commitment for multiple years and skills to prepare the appropriate returns or obtaining resources to do so.
The Executor should ensure that the person requesting their time for fulfilling these responsibilities have their affairs in order. For responsibilities related to taxation this includes:
– filing all required personal income tax returns;
– adequate records in case of disputes;
– historical records of investments to identify the adjusted cost base upon disposal or donation to charity; and
– an inventory of all assets including their location and how to access them.
For further information on a Legal Representative’s responsibilities see Canada Revenue Agency Resources
General Inquiries – 1-800-959-8281
Tax Offices – http://www.cra-arc.gc.ca/cntct/tso-bsf-eng.html
What To Do Following A Death: http://www.cra-arc.gc.ca/E/pub/tg/rc4111/rc4111-13e.pdf
Preparing Returns for Deceased Persons 2013: http://www.cra-arc.gc.ca/E/pub/tg/t4011/t4011-13e.pdf
Tax Clearance: http://www.cra-arc.gc.ca/tx/ndvdls/lf-vnts/dth/clrnc-eng.html