Optional Returns for a Deceased Person in Canada: Can They Save Tax?

When someone dies, all of their income up to the date of death normally lands on one final return. That can push a lot of income into a single year and produce a larger tax bill than expected.

The CRA allows extra, optional returns in some cases. They split certain income off the final return so that some credits and deductions can be used again. This article explains the types, who they suit and what to watch for.

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

What optional returns are

Optional T1 returns are not required, and they may reduce or eliminate tax. There are three types, and each is only available for eligible income sources and time periods.

The legal representative decides whether to file them. Because they are elections, they only make sense when the numbers show a real benefit.

Return for rights or things

Rights or things are amounts that would be 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 a separate person.

Examples the CRA lists include salary, commissions and vacation pay for a pay period that ended before death and was paid after, retroactive salary adjustments, and OAS and CPP/QPP for the month of death paid after death. Uncashed matured bond coupons, bond interest earned but not received, and dividends declared before death but not received also qualify. Accounts receivable, supplies and inventory qualify 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.

To file, use the T1 package for the year of death and the province of residence at death, and write 70(2) in the top right corner of page 1. Report only the eligible income there, not on the final return.

Return for a partner or proprietor

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. The due dates are the same as for the final return.

Separate timing rules apply to self-employed people, so confirm the filing date for your situation.

How the saving works, and its limits

The saving comes from claiming certain credits and deduction amounts again on the separate return. Those claims are capped: the total across the final and optional returns cannot be more than what would have been allowed if only the final return were filed.

• Funeral expenses, probate fees and estate administration fees are not deductible.
• If rights or things are transferred or distributed 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 deadline for the rights or things return is 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 for the rights or things return is generally due April 30, the same as the final return, although part may be deferred in some cases.

Income the estate earns after death, such as investment or rental income, is reported on the T3 return, not the final T1.

What to do next

• List every amount owing to the deceased at death that was unpaid, such as final pay, benefits and dividends.
• Note whether the deceased or a spouse or common-law partner ran a business.
• Hold off distributing items that might qualify as rights or things until you have decided on the election.
• Ask an accountant or lawyer to compare the tax with and without optional returns before you file.

Every estate is different, so have a professional confirm which returns are worth filing.

Frequently asked questions