Can CRA Audit or Reassess a Deceased Person's Return in Canada?

Receiving a CRA letter or a notice of reassessment addressed to someone who has died is unsettling, especially when you are already managing an estate. How this applies to you depends on your situation, so it is worth confirming with a lawyer before you reply to the CRA.

This page explains what is usually at stake for the legal representative, which returns may be involved, and how penalties, interest and the clearance certificate fit in. Specific time limits and objection deadlines turn on the facts and on the notice you received, so they are best confirmed with a lawyer or accountant.

This article covers Canadian federal tax law, which applies in every province.

Which returns the CRA may be looking at

An estate often involves more than one return, and a letter may concern any of them. Knowing which one is in question is the first step.

• The final return for the deceased, which reports the deemed sale of capital property just before death, with any gain or loss shown on Schedule 3 and line 12700.
• The estate's T3 Trust Income Tax and Information Return, which reports income the estate earns after death and gains on property the estate sells after death.
• Optional returns, such as Rights or Things, which the representative may file but is not required to file.

Check the tax year and return type on the notice. Mixing up the final return and the T3 is a common source of confusion, because the deemed gain at death belongs on the final return and not with the beneficiaries.

Your position as legal representative

The legal representative is jointly and severally liable with the taxpayer for unpaid amounts, but only to the extent the representative controls the taxpayer's or the estate's property, and for obligations connected with the representative's own responsibilities.

This is why the clearance certificate matters. A representative must obtain a certificate from the Minister before distributing property under their control. Without it, the representative is personally liable for those amounts up to the value of the property distributed, and can be assessed at any time.

Even with a certificate, the CRA can still recover unpaid tax later from an estate or its beneficiaries. Holding back enough property to cover a possible liability is therefore a practical safeguard.

Penalties and interest if the notice shows a balance

If you file late and owe a balance, two costs can follow. The late-filing penalty is 5% of the balance plus 1% for each full month late, up to 12 months, and it can be higher if a late-filing penalty was assessed in any of the 3 previous years. Unpaid balances also bear compound daily interest from the day after the due date.

For a late T3 return, an alternative penalty of $25 per day, with a minimum of $100 and a maximum of $2,500, can apply even when no balance is owing.

The CRA may cancel penalties or interest for circumstances beyond your control. Whether your circumstances qualify is a decision for the CRA, so it helps to explain clearly what happened and keep records that support it.

Time limits, objections and voluntary disclosure

How long the CRA has to reassess, how long you have to object, and whether a voluntary disclosure is available for unreported income all depend on the facts, the type of return and the wording of the notice. Do not rely on a general rule: confirm the deadlines in your notice with a lawyer or accountant as soon as it arrives.

If you discover income that was left off the deceased's return, such as a retirement plan amount or a gain on property, getting advice before contacting the CRA is wise. An unreported RRSP is a useful example, since the full fair market value of an unmatured plan is generally included on the final return.

Where a payment cannot be made right away, the representative can ask to delay payment of tax on the final return by giving the CRA acceptable security and completing Form T2075, though interest still accrues.

What to do next

• Note the date you received the notice and keep the envelope or portal record.
• Identify the return and tax year involved: final return, T3, or an optional return.
• Gather the will, prior returns, T-slips and records of the value of property at death.
• Hold off on distributing estate property until you have confirmed whether a clearance certificate is needed.
• Ask a lawyer or accountant to confirm the response deadline and your options before you reply.

When you are ready to request a clearance certificate, use Form TX19, which should not be filed until the notices of assessment have been received unless an exception applies.

Frequently asked questions