Dealing with estate taxes Step 4: file returns.
Income tax returns should be filed for each year in sequence. Usually the filings are by the authorized representative of the estate trustee (Miltons or other tax professional).
Many years of arrears are common
It is not uncommon for the deceased to have stopped filing tax returns several years prior to their death.
This is not the fault of the estate trustee (although perhaps should have been dealt with by an attorney for property) and is not a cause for alarm or distress.
Penalties and interest may be payable by the estate as a result of the late filing (and payment of tax arrears). These are usually a legitimate estate expense (not chargeable to the trustee personally), and sometimes CRA will reduce or waive them entirely.
The estate trustee should file all missing returns, starting with the first year missing and moving forward to the year of death, as soon as practiable.
Often the estate trustee does not know for certain the last year filed. Often the authorized representative of the estate trustee can determine the last tax return filed by the deceased by checking with CRA. Once that is determined, a return should be filed for each calendar year up to and including the year of death.
Report all taxable income
The income of the deceased for the years prior to death is often relatively straightforward and can be determined from ‘T slips’ – Canadian pensions (including CPP and OAS), and interest and dividends which involve Canadian financial institutions will be reported on T slips provided to the taxpayer and to CRA.
A common source of complexity and mis-filings lies with income from outside Canada such as foreign pensions, savings and investments. These must be reported. Often the amounts received by the taxpayer can be deduced from their bank statements when funds are deposited into a Canadian bank account but this method does not work if the income is not paid into a Canadian account.
It is most complex to determine the taxable income to report on the T1 return for the year of death (referred to as the terminal return). This return should include all income actually received plus all income arising from ‘deemed dispositions on death’ of all capital property. The most common significant deemed dispositions are RRIFs and RRSPs, and real property including houses and cottages. Actual values for RRIFs and RRSPs can be obtained from the financial institution. Values for real property on death are usually determined by appraisal but the taxpayer’s ‘adjusted cost base’ for the property must be determined from receipts.
Correct values for these assets must be reported on the T1 terminal return even if income taxes are deferred as a result of a ‘spousal roll-over’.
Claim deductions and credits
Taxpayers often incur significant medical expenses in the years prior to death. These should be claimed when appropriate for tax purposes. Proper documentation (receipts!) is essential.
If the taxpayer was disabled in one or more years, it may be possible to claim the disability tax credit.
Many other income tax deductions and credits are possible depending on the specific circumstances of the deceased taxpayer and these can all reduce taxes payable. The help of an experienced tax professional is essential.
Returns for the estate
T3 tax returns for the estate should be filed for each year that the estate earned income. Some estates earn no income and need no returns, but more commonly, only one or two returns are required for the year(s) before the estate ceased to earn income.
T3 trust returns are quite different from T1 personal returns – different forms, different deadlines, different rules. Assistance from an experienced tax professional is essential to prepare and file these returns properly.
Retain records
The estate trustee should retain all documents and records related to the income taxes of the deceased for at least 6 years and until the estate trustee receives a clearance certificate from CRA.
Contact us to discuss how we can help you file income taxes for the estate.