Can an Executor Delay Paying Tax on Capital Gains Deemed at Death in Canada?

As an executor, you may open the deceased's affairs and find a large tax bill waiting on the final return. The cause is often the deemed sale of capital property at death, even though nothing was actually sold and the estate may hold little cash.

This article explains when the balance is due, how you can ask to delay payment, what happens if you pay or file late, and how your own personal liability works. It covers federal tax rules only, and the details of your situation are worth confirming with a lawyer or accountant.

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

Why the final return can carry a large bill

On death, the taxpayer is deemed to have disposed of each capital property immediately before death for proceeds equal to its fair market value. The tax on that deemed sale is carried by the final return, not by an inheritance tax.

The gain or loss is the fair market value on the date of death minus the adjusted cost base, and it is reported on Schedule 3 and line 12700 of the final return. The deceased reports the gain on the final return, not the beneficiaries.

When the balance is due

For a death from January 1 to October 31, the filing and the balance owing are both due April 30 of the year following the death. For a death from November 1 to December 31, the final return is due 6 months after the date of death, on the same calendar day as the date of death.

If the deceased, or a spouse or common-law partner living with them, carried on a business on the date of death, the filing date moves to June 15 of the following year for deaths from January 1 to December 15. For deaths from December 16 to December 31, it is 6 months after death. The payment due date does not change for business income.

Delaying payment with security and Form T2075

To delay payment of tax on the final return, the representative must give the CRA acceptable security and complete Form T2075. The CRA says this is required to delay payment, and interest still accrues.

So a delay is a way to avoid selling assets in a rush, not a way to reduce the cost. What counts as acceptable security is for the CRA to accept, so it is worth discussing with a lawyer or accountant before you rely on it.

Penalties, interest and relief

• Late filing with a balance owing: 5% of the balance plus 1% for each full month late, up to 12 months. It can be higher if a late-filing penalty was assessed in any of the 3 previous years.
• Unpaid balances bear compound daily interest from the day after the due date.
• The CRA may cancel penalties or interest for circumstances beyond your control.
• A late T3 return can attract an alternative penalty of $25 per day (minimum $100, maximum $2,500), even with no balance owing.

The T3 return for the estate is due 90 days after the trust's year-end. Gains on property the estate sells after death are reported on the T3, not on the final return.

Your personal liability and the clearance certificate

A 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 estate's property.

Before distributing property under your control, you must obtain a certificate from the Minister confirming that amounts have been paid or security accepted. Without it, you are personally liable for those amounts up to the value of the property distributed, and you can be assessed at any time.

The certificate is requested on Form TX19 and issued on Form TX21. TX19 should not be filed until the notices of assessment have been received, unless an exception applies. You can include attachments such as the will and a proposed distribution statement.

A new certificate is not required before each distribution as long as enough property is retained to cover any potential liability. The certificate does not stop the CRA from recovering unpaid tax later from an estate or beneficiaries.

The spousal rollover and what to do next

If property of a taxpayer resident in Canada immediately before death is transferred or distributed as a consequence of death to a spouse or common-law partner resident in Canada, the usual deemed disposition at fair market value does not apply. Instead, the deceased is deemed to dispose of the property for proceeds equal to the adjusted cost base, or, for depreciable property, the lesser of capital cost and cost amount, and the spouse is deemed to acquire it at that same amount. A spouse who was not resident in Canada immediately before the death does not qualify, and the ordinary deemed disposition applies. A qualifying spouse trust created by the will can also qualify. The property must vest indefeasibly in the spouse or trust within 36 months after death, or a longer period the Minister allows on written application.

• Confirm the date of death and the matching due date for the final return.
• List the capital property and its fair market value at death, and check whether a rollover applies.
• Estimate the tax and compare it with the cash available in the estate.
• If you need more time to pay, discuss acceptable security and Form T2075 with a lawyer or accountant.
• Keep enough property in the estate to cover possible tax, and request the clearance certificate before distributing.

Frequently asked questions