Estate Tax Obligations

Estate Tax Obligations

Canada does not have an estate or inheritance tax per se, but there are significant tax obligations and requirements. If you have agreed to be the Executor of the Will for a family member or friend you should be aware of these responsibilities.

Terminal Personal Tax Return

For the year of death the executor must file a personal income tax return for the deceased from the beginning of the calendar year to the date of death. All income earned up until the date of death must be included.

Additionally, all assets owned by the deceased are deemed to be sold immediately prior to death at their fair market value. The resulting capital gains must be included in this terminal personal tax return. This includes real property (most significantly cottages or secondary properties not sheltered by the principal residence exemption), investments and shares of any private businesses. The full amount of all RRSPs also becomes income in this return.
These rules lead to the largest tax obligation for most estates.

However, if all assets are left to a spouse in the Will, the assets can be rolled over at cost, thereby avoiding the capital gains and the resulting tax in this return.

Optional Returns

For the year of death the executor has a few optional personal income tax returns that they can elect to use.

The most commonly used optional return is known as the Rights or Things return. Included in this return is income earned and payable at the time of death for which payment had not been received by the deceased. Most frequently this includes pension benefits (CPP and OAS) and dividends from investments, but can also include unpaid salary or commissions.

These optional returns present an opportunity to double up on some personal tax credits as well as additional access to marginal tax rates. These result in tax savings on income that would otherwise be reported on the terminal tax return.

Estate Return

Starting the day after death, any income earned is income to the estate and therefore gets reported and taxed separately in the name of the Estate.

For 36 months following the date of death the income can be taxed as part of the Graduated Rate Estate. Under this classification income is taxed at the same marginal rates as individuals. This time period gives the executor opportunity to administer the estate and dispose of the assets or transfer them to the beneficiaries.

Estate returns must be filed annually, but the year-end date can be chosen (does not have to be calendar).

If the Will calls for the creation of separate trusts, these must be established separately and have their own reporting and tax requirements.

Clearance Certificate

As the executor you are responsible and liable for all the taxes and debts of the deceased. Therefore if you distribute the estate funds to the beneficiaries prior to ensuring all tax debts are paid, you will be held personally responsible for paying the taxes.

To mitigate this liability somewhat you can apply for a “Clearance Certificate” once all the necessary tax returns have been filed and assessed.

A clearance certificate is Canada Revenue Agency’s confirmation that required returns have been filed, assessed and tax obligations paid.

Estate Administration Tax

This is a provincial tax that varies by province (previously known as “Probate Fees”).

This is not an income based tax, but a tax that is assessed on the value of the estate at the time of death. This tax is required in order to have the Courts certify the appointment of the estate executor.

The tax obligations of an estate are numerous and as the executor you are responsible for all of them. It is important to know your responsibilities and be compliant with them.