Death of a Taxpayer

When a person dies, their legal representative (executor or administrator) must file a final T1 return and possibly other returns. Death triggers deemed dispositions that can create a large tax bill, but several rollovers and elections are available.

THE FINAL RETURN

Covers income from January 1 to the date of death.
Due April 30 of the following year, or six months after the date of death if later. For self-employed individuals, June 15 or six months after death.
The full basic personal amount and most credits can be claimed.
Medical expenses can be claimed for any 24-month period including the date of death.
Donations, including those made by the will or by the estate through direct beneficiary designations, can be claimed up to 100 percent of net income on the final return and the year before.

DEEMED DISPOSITION ON DEATH

All capital property is deemed sold at fair market value immediately before death, which can create capital gains (and recapture on depreciable property).
Spousal rollover: property left to a spouse, common-law partner or a qualifying spousal trust transfers at cost, deferring the gain until the spouse's death or sale.
Net capital losses in the year of death and the year before can be used against any income.

REGISTERED PLANS

The full value of an RRSP or RRIF is included in income on the final return, unless left to a spouse (tax-free transfer to the spouse's plan) or to a financially dependent child or grandchild (rollover or annuity options).
A TFSA's value at death is tax-free; growth after death is taxable to beneficiaries unless a spouse is named as successor holder.
An FHSA can pass to a spouse as successor holder.

OPTIONAL RETURNS

Up to three optional returns can be filed in addition to the final return, each allowing another basic personal amount and certain credits: a return for rights or things (such as uncashed pay cheques and declared but unpaid dividends), a return for business income from a partnership or proprietorship with a non-calendar fiscal period, and a return for income from a graduated rate estate.

AFTER DEATH

Income earned by the estate after death is reported on a T3 trust return.
A graduated rate estate (up to 36 months after death) is taxed at graduated rates.
The representative should obtain a clearance certificate (Form TX19) before distributing property, to avoid personal liability for unpaid tax.
CPP death benefit: a lump sum of $2,500, taxable to the estate or the recipient.