Debt and taxes

Several things take centre stage when a loved one passes. Grief and mourning intermingle with funeral arrangements, and the reality of administering the deceased’s estate. The personal representative (executor in some jurisdictions, estate trustee in Ontario, liquidator in Quebec) is a major player. He must deal with estate debts, potential claims against the estate and taxes.

Here’s how to address those issues.

Debts

These debts are often in the form of credit card debts, mortgages, and promissory notes. As funds become available, the personal representative can settle these debts. If the deceased is sole owner of real property secured by a mortgage, the mortgage may either be paid off with cash reserves already in the estate or through proceeds from sale of the property itself.

If the property is bequeathed directly to a beneficiary, the beneficiary will assume that mortgage (unless there’s wording to the contrary in the will). If the beneficiary takes on the mortgage, the personal representative should request a release from the lending institution to prove the mortgage is no longer a debt of the estate.

Read: Death and taxes: what you need to know

Claims

Claims include debts that others say the deceased owes them. To account for potential and legitimate debt, the personal representative could place an ad for creditors and claimants in newspapers in the area where the deceased last lived, or had a majority of his assets. This notice to creditors is only required in two provinces: PEI and Nova Scotia. But in Ontario, for example, if the personal representative places this notice, the estate trustee will not be liable for non-payment of debts outside the timeframe set in the notice.

Read: 5 tax benefits of a testamentary trust

In Alberta, if the personal rep publishes the notice, claimants have 30 days after the last day of publication to notify the personal representative of claims. If someone makes the claim after the 30-day period, he must go to court. Once the claims are verified and settled, the personal representative is now protected from future claims against the estate. However, creditors can generally go after estate property that beneficiaries have inherited.

In Quebec, the liquidator must put together an inventory of the deceased’s property, and register a notice of closure of inventory. He then informs those with an interest in the estate, including creditors, and must also publish this notice of registration in a newspaper where the deceased last lived.

Income Tax Liability

The personal representative is legally responsible for filing the deceased’s income tax return and any liability associated with that return. In Canada, if death occurred between January 1^st and October 31^st, the final return is due April 30^th of the following year. If death occurred between November 1^st and December 31^st, the return is due six months after the date of death.

Read: 6 ways to reduce a tax bill

However, if the taxpayer, their spouse/common law partner operated a business and death occurred between January 1^st and December 15^th, the final return is due June 15^th of the following year; if death occurred between December 16^th and December 31^st, the return is due six months after the date of death.

The personal representative must also file any prior-year returns that the deceased neglected to file. The CRA will charge a late filling penalty of 5% on the balance owing for 2011 outstanding returns, and 1% of the balance owing for each subsequent month of non-filing to a maximum of 12 months. If the three prior years’ returns were not filed, the penalty rises to 10% of the 2011 balance owing. As of May 2012, the CRA will also charge a daily compounded interest on any balance owing.

If the estate earns income after the person dies but before his estate can be distributed, the personal rep may have to file a further T3 return.

Once the personal rep files all returns and receives all notices of assessment, he can distribute the remains of the estate only after obtaining a final tax clearance. The CRA says this “certifies that all taxes have been paid or that acceptable security has been provided before distributing any property under their control.”

Tim Brisibe

Tax & Estate

Tim Brisibe, TEP, is Director, Tax & Estate at Mackenzie Investments.