Filing the deceased’s income tax return

Executors have a duty to file tax returns and pay any tax liabilities on behalf of the deceased.

As the legal representative of the deceased for the purposes of the Income Tax Act, the executor becomes that taxpayer to the extent of the estate’s assets. This means they may be held personally liable for tax if they distribute estate assets before paying all tax amounts owed.

“An executor steps into the shoes of the deceased and they take on liability, as well, for any taxes that are owing, whether they’re aware of it or not,” said Matt Trotta, vice-president of tax, retirement and estate planning with CI Asset Management in Calgary. “They need to be mindful of when they distribute [estate assets to beneficiaries] to ensure that they’ve covered their bases on any tax liability before doing so.”

There are special rules governing the filing of income tax returns and the payment of any balance owing for the deceased.

The executor must file a T1 Income Tax and Benefit Return and pay any balance owing for the year of death (see “T1 filing timeline,” below). And there are three optional TI returns that may allow the executor to reduce the deceased’s total tax liability (see “Optional T1 returns,” below).

Executors are also responsible for filing any previous returns the deceased didn’t file. If the person died before April 30, for example, they probably hadn’t filed a tax return for the previous year. In that case, the deadline for filing and payment of tax for the previous year’s return is six months after the date of death. However, for any other unreported returns from previous years, the deadline for filing and payment remains April 30 of the following year. For example, if the deceased didn’t file a return in 2021, the deadline for filing the return and payment is April 30, 2022.  

In preparing tax returns, the executor may discover the deceased had not complied with their tax filing obligations in previous tax years.

“It could be something as simple as [unreported income from] a foreign pension,” said Rosa Maria Iuliano, a tax partner with Baker Tilly in Ottawa. “That happens a lot.”

In such cases, the executor is obligated to report unreported income, and would be wise to seek professional tax advice and to consider whether filing a voluntary disclosure with the Canada Revenue Agency might be appropriate. If the CRA identifies non-compliance, the agency may assess interest and penalties in addition to any tax owing on the unreported income, which will represent a liability to the estate.

“When you notice one [non-compliance] issue, that’s when you question whether there are others,” Trotta said. “You want to protect the estate, the beneficiaries and [yourself as] the executor from headaches, complications and added costs, and that’s where we would recommend a deeper dive.”

It’s also a good idea to consult with a tax professional about opportunities for reducing the estate’s overall tax liability at the time of death, Trotta said. For example, it may be possible to carry back losses realized in the first year of an estate to the final return and claim the losses against capital gains, if certain conditions are met.

After filing the final return and any estate returns, and before making distributions, the executor should consider applying for a clearance certificate from the CRA. The certificate confirms the estate has paid all tax owing and relieves the executor of personal liability on any tax the estate might be found to owe in the future.

However, executors should be aware that the CRA, while processing a clearance application, may discover non-compliance that the executor hadn’t identified, Iuliano said. In the case of one her clients, the CRA looked back through land transfer records to discover the deceased had unreported income from a sale of real estate 10 years before their death.

“One of the pieces of advice I tend to give executors on Day 1 is to be very cautious about doing interim distributions [to beneficiaries],” Iuliano said. “If you don’t know what [the deceased’s] tax history is, or how compliant they were, you have to be prepared for something that CRA could find as well.”

T1 filing timeline

The executor must file a T1 Income Tax and Benefit Return, and pay any balance owing, for the year in which the deceased died by April 30 of the following year. If the deceased died in November or December, the deadline is six months after the date of death. If the deceased or their spouse was self-employed, the deadline is June 15 of the following year. (If the deceased died between Dec. 16 and Dec. 31, it’s six months after the date of death.)

Optional T1 returns

There are three additional optional TI returns that can be filed for the deceased: a Rights and Things return, a Partnership or Proprietorship return and an Income from a Graduated Rate Estate (GRE) return.

If income is reported on one or more of these optional returns, the executor may be able reduce the deceased’s total tax liability by accessing another set of graduated tax rates and tax credits.

The executor can claim any income payable to the deceased, but not received by them before they died, on the Return for Rights or Things. For example, salary or vacation pay earned before death but paid after death could be claimed on a Rights or Things return.

Executors can claim any income received between the end of a business’s fiscal year and the date of death on a Partnership or Proprietorship return if the deceased was a sole proprietor or partner and the business did not have a calendar year-end. Any income received by the deceased from the GRE of another person between the fiscal year-end of the GRE and the deceased’s date of death can be claimed on the Income from a GRE return.

T3 returns

The executor may have to file a T3 income tax return for the estate, which is a trust, to the CRA annually until final distributions are made.

Also, if the deceased’s will created other trusts — for example, a trust for a disabled beneficiary — an annual T3 return will have to be filed for those trusts too.

These requirements to file a final T1 return for the deceased and T3s for the estate and other trusts with the CRA should not be confused with applying to probate the will, and paying any associated probate tax, with the provincial government.