Optional Returns for a Deceased Person in Canada: Cutting Tax

When someone dies, the executor must file a final return. Many people do not realize that Canadian tax rules also let the legal representative file extra returns for the deceased, which can lower the total tax bill.

This article explains the optional returns, which income each one covers, how the deadlines work and where the traps are. Every estate is different, so an accountant or lawyer can confirm what fits your situation.

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

The three optional returns

Optional T1 returns are not required, and they may reduce or eliminate tax. They are only available for eligible income sources and time periods. The three types are listed below.

Income the estate earns after death is generally reported on a T3 return, not the final T1. The 104(23)(d) return is a separate option tied to a graduated rate estate, so ask a professional whether your estate qualifies.

Rights or things: what qualifies

Rights or things are amounts that would have been income when received, other than capital property. Their value at death is normally 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 that ended before death and was paid after.
• OAS and CPP or QPP for the month of death paid after death, 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, and some retroactive contract settlements payable after death are excluded.

How the saving works

On the separate return, you report only the eligible income, not on the final return. The saving comes from claiming certain credits and deduction amounts again on the separate return.

There is a limit. When you split deductions and credits across the final and optional returns, the total claimed cannot be more than would have been allowed if only the final return were filed. Funeral expenses, probate fees and estate administration fees are not deductible.

Partner or proprietor returns and deadlines

Where a business's short fiscal period ends because of death, the legal representative may elect to exclude that business income from the final return and file an additional return as if for a separate person. Form T1139 Part 3 covers businesses with a non-December 31 year-end. Due dates match the final return.

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

Be careful with timing. If rights or things are transferred to beneficiaries before the election period ends, the election does not apply to them, and the beneficiary includes the amount in income when received.

The final return, penalties and clearing the estate

The legal representative is usually the executor named in the will (in Québec, the liquidator). They must notify the CRA of their role before accessing the deceased's tax records and are responsible for ensuring returns are filed and balances owing are resolved.

If the person died between January 1 and October 31, the final return and any balance owing are due April 30 of the following year. If death was between November 1 and December 31, the final return is due 6 months after the date of death. The payment date for a balance owing does not move with the later filing dates, and you may need to pay before filing to avoid interest. Different dates apply where the deceased or their spouse or common-law partner ran a business, but the payment date is still not extended.

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. Interest is compounded daily on unpaid amounts, and it also applies to late-filing penalties. The CRA may cancel penalties or interest if a late filing was caused by circumstances beyond your control.

Before distributing property, the legal representative must obtain a clearance certificate. Distributing without one can make them personally liable, up to the value distributed. You apply only after all returns are filed and assessed and amounts owing are paid or secured.

What to do next

• Notify the CRA of your role as legal representative before you try to access the deceased's tax records.
• List income owed to the deceased but unpaid at death, such as final pay and declared dividends.
• Find out whether the deceased or their spouse or partner ran a business with a non-December 31 year-end.
• Hold off distributing rights or things until the election period has passed.
• Mark an optional T1 package correctly, for example with 70(2) in the top right corner of page 1.
• Ask an accountant to compare the tax with and without each optional return.

Frequently asked questions