Income Earned After Death: Final T1 Return or Estate T3 in Canada?

Money often keeps arriving after someone dies: a bank interest payment, a dividend, a final rent cheque or a last pay. The question for an executor is which tax return should carry it.

The answer depends on when the income was earned, not simply when it was received. This article walks through the dividing line in Canadian federal tax and the options that can reduce tax.

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

The basic dividing line

Income earned up to the date of death goes on the final return, even if it is received after death, unless it is filed on an optional return. Income the estate earns after death goes on the T3 return instead.

The CRA names pension, investment, business, farming and rental income as the kinds of post-death income that go on the T3.

Interest, rent and other periodic amounts

Periodic amounts such as interest, rent, royalties and annuities that were not paid before death are treated as accruing daily up to the date of death. The part that accrued to death is included in the deceased's income for the year of death.

In practice, one payment can be split. A rent cheque received after death may be partly the deceased's income and partly the estate's, depending on the days it covers. An accountant can help you work out the split.

Rights or things and the optional return

Rights or things are amounts that would have been income when realized, other than capital property. Their value at death is included in the deceased's income, but the legal representative can elect to report them on a separate return, taxed as though for a separate person.

• Salary, commissions and vacation pay for a pay period ended before death and paid after.
• Retroactive salary adjustments, and CPP and EI arrears.
• Uncashed matured bond coupons, bond interest earned but not received, and dividends declared before death but not received.
• Accounts receivable, supplies and inventory, but only if the business used the cash method.

Capital gains are not rights or things. To file this return, use the T1 package for the year of death and write 70(2) in the top right corner of page 1. The saving comes from claiming certain credits and deduction amounts again on the separate return.

The T3 return for the estate

A T3 return is needed if the estate earns income after death or distributes property to beneficiaries, and it is due 90 days after the trust's tax year-end, or after final distribution if the trust ceases to exist. A graduated rate estate may choose any year-end up to one year after the date of death, while a non-GRE testamentary trust has a December 31 year-end. GRE status ends at 36 months after death.

A TFSA is a common source of confusion. The deceased reports no TFSA income on the final or optional returns. What is taxable afterward depends on the type of TFSA: for deposit or annuity TFSAs, all earnings after death are taxable to the beneficiary, and for trust TFSAs, amounts above the fair market value at death are taxable. A successor holder, such as a surviving spouse or common-law partner named in the contract or will, simply becomes the new holder, and the fair market value at death and later income are not taxable to them.

Timing traps

The rights or things return is due on the later of one year after death and 90 days after the notice of assessment for the final return was sent. Payment is generally due April 30, though part may be deferred in some cases.

The final return is due April 30 of the following year if death was between January 1 and October 31, and six months after the date of death if it was between November 1 and December 31. The payment date for a balance owing does not move with the later filing dates. Different dates apply in some situations, such as self-employment, so confirm yours.

A late final return with a balance owing carries a penalty of 5% of the balance plus 1% of the balance for each full month late, up to 12 months, and the penalty may be higher if a late-filing penalty was assessed on the deceased's return for any of the 3 previous years.

If rights or things are distributed to beneficiaries before the election period ends, the election does not apply to them, and the beneficiary instead includes the amount in income when received.

A payment for the month of death from CPP or OAS can be reported on the final return or an optional return. The estate is entitled to the payment for the month of death.

What to do next

Before distributing property, the legal representative must obtain a clearance certificate confirming the deceased's amounts have been paid or secured, and distributing without one can make the representative personally liable up to the value distributed. Apply only after all returns are filed and assessed.

• List every payment received since death and note the period it covers.
• Sort each into income earned before death, rights or things, or income the estate earned later.
• Hold off distributing rights or things until you have considered the election.
• Keep the T4, T5 and other information slips together.
• Ask an accountant whether an optional return would lower the total tax.

Frequently asked questions