| The terminal return |
The Terminal Return is the deceased person’s final personal income tax return.
It covers the period from January 1 to the date of death, in the last year of life.
All income actually earned during the period must be reported, such as:
- Employment income
- Pension income
- Government benefits
- Investment income
- RRSP/RRIF withdrawals(where applicable)
- Any other income earned up to the date of death
Also, all deemed dispositions must be included (deemed dispositions are discussed here)
During life, income is reported over many years.
At death, several sources of income may all be reported in the same taxation year, including:
- Capital gains on investments and real estate
- The full value of RRSPs or RRIFs
- Regular employment or pension income
- Other taxable income earned before death
As a result, the deceased’s taxable income may be much higher than in previous years, which can result in a larger income tax liability.
This does not necessarily mean a mistake has been made. It is often the result of how Canada’s income tax rules apply after death. Note in particular that contributions to RRSPs are tax-deductible when they are made. Thus, including them in taxable income when the funds are withdrawn or in the deemed disposition on death is fair and equitable.
| Why is the terminal return so difficult to prepare? |
Terminal returns are not like other returns. Because of these deemed dispositions, preparing the tax return for the last year of life of the deceased takes much more effort than a preparing a tax return for a regular year. In particular, collecting appraisals and valuations for ‘date of death values’, and compiling documentation to support ‘deductible expenses’ is often time-consuming and challenging.
In addition, once this information has been gathered, preparing the terminal return takes more effort, skills and thought than preparing a regular annual income tax return. As much of the income on a terminal return arises from deemed dispositions, the return preparer cannot simply rely on numbers on a T-slip. Instead, numbers are compiled from analysis and calculation.
Lastly, items such as the “principal residence exemption” and ‘spousal roll-overs” take time and skill to document properly.
Can Anything Be Done to Reduce the Tax?
Every estate is different, but opportunities may include:
- Claiming all available deductions and credits such as medical and long term care expenses, and the disability tax credit
- Reviewing whether optional returns are beneficial
- Determining whether losses can offset gains
- Reviewing rollover opportunities where available (especially spousal roll-overs)
- Ensuring adjusted cost bases are accurate
- Preparing any additional required estate tax returns
Careful planning can sometimes reduce the overall tax payable by the estate.
What Happens After the Terminal Return Is Filed?
Depending on the estate, additional steps may include:
- Filing prior-year tax returns (if required)
- Filing a T3 Trust Income Tax Return if the estate earns income after death
- Paying any outstanding tax balances
- Applying to the Canada Revenue Agency for a Clearance Certificate before making the final distribution of estate assets
Taxes on income after death.
After death, the estate is its own separate taxpayer. If income is earned in the estate after death but before assets are distributed to beneficiaries, the trustee will need to file a tax return for each year.
Most estates need to file at least one estate return because the trustee collects the CPP death benefit into the estate. This is a taxable benefit and it needs to be reported by as income by the estate.
Other common examples of estate income are:
- A house sold by estate
- Interest on GICs that mature after death
We Can Help
Our in-house estate tax team works exclusively with deceased taxpayers and estates, coordinated with our probate and estate settlement teams to guide and assist estate trustees at each step.
We can assist with:
- Terminal (Final) Income Tax Returns
- T3 Estate Trust Returns
- Optional Returns
- Review of capital gains and deemed dispositions
- RRSP and RRIF tax reporting
- Tax planning opportunities available after death
- CRA correspondence
- Clearance Certificate applications
Questions?
We are here to help. Contact Miltons Estates to discuss any aspect of your estate including tax obligations.