- Optional T1 returns are not required, but they may lower tax by letting certain credits be claimed more than once.
- The Return for Rights or Things has its own due date, but any tax on it is payable by the final return's payment date.
- Income the estate earns after death goes on a separate T3 return, which is due 90 days after the trust's year-end.
When someone dies, the executor must file a final return. Many executors then hear that extra returns exist and wonder whether they are worth the effort. The short answer is that they are optional, and whether they help depends on the deceased's income and credits.
This article explains what optional returns are, which ones executors most often ask about, how their deadlines work, and what else can lower tax on the final return. It is general information, and an accountant or lawyer can confirm what fits your estate.
This article covers Canadian federal tax law, which applies in every province.
What an optional return is
An optional return is an additional T1 return that the legal representative may choose to file for the deceased. Examples include a Return for Rights or Things, a partner or proprietor return, and a return for graduated rate estate (GRE) income.
The reason to file one is that it may reduce tax by allowing certain credits to be claimed more than once. None of them is required. If a return would not save tax, there is generally no reason to file it.
The optional returns executors ask about most
| Return | What it is | Key point |
|---|---|---|
| Rights or Things | Optional T1 return | Due by the later of one year after death or 90 days after the final return's notice of assessment |
| Partner or proprietor | Optional T1 return | Relevant where the deceased had business interests; may allow credits to be claimed again |
| GRE income | Optional T1 return | Named by the CRA as an optional return; how it fits with the estate's T3 return depends on the facts and is worth confirming with an accountant |
How much any of these saves is a calculation that depends on the deceased's income, the credits available and how the property is held. That is a good question to put to an accountant before deciding.
Deadlines and payment
The final return is due April 30 of the following year for a death from January 1 to October 31. For a death from November 1 to December 31, it is due 6 months after the date of death. If the deceased or a spouse or common-law partner living with them carried on a business, the filing date is June 15 of the following year for deaths from January 1 to December 15, but the payment date does not change.
For a Return for Rights or Things, the tax is payable by the final return's payment date, even though the filing date can be later. Late filing with a balance owing can bring a penalty of 5% of the balance plus 1% for each full month late, up to 12 months, and unpaid balances bear compound daily interest.
Other ways to lower tax on the final return
Optional returns are only one tool. Several other choices are made on the final return itself, so it helps to review them together.
- Opting out of the spousal rollover on a property-by-property basis can help use the deceased's losses, the capital gains deduction or lower rates.
- Net capital losses in the year of death and the prior year can offset income other than capital gains, which is not normally allowed in other years.
- Gains on qualified small business corporation shares or qualified farm or fishing property may be eligible for the lifetime capital gains deduction, claimed with Form T657.
- If a GRE disposes of capital property in one of its first three taxation years and its capital losses exceed its gains, the representative may elect, by the estate's filing due date for that year, to treat part of the excess as the deceased's loss on the final return, and the final return must then be amended.
Keep in mind that income earned by the estate after death is reported on the estate's T3 return, not the final return. The T3 is due 90 days after the trust's year-end.
What to do next
- Gather the deceased's income slips, business records and a list of property held at death.
- Note the date of death, since it sets the final return deadline.
- Ask an accountant to compare the tax with and without each optional return.
- Calendar the Return for Rights or Things deadline separately from the final return.
- Confirm whether the estate will file a T3 and when its year-end falls.
- Talk to a lawyer or accountant before distributing estate property, so tax owing is not overlooked.
Frequently asked questions
Do I have to file an optional return?
No. Optional returns are not required, and the representative may file them if they may reduce tax. If the savings would be small or nil, you can skip them.
When is a Return for Rights or Things due?
It is due by the later of one year after death or 90 days after the final return's notice of assessment. Any tax is still payable by the final return's payment date.
Is the estate's T3 return an optional return?
No. Income the estate earns after death is reported on a T3 return rather than the final return. The T3 is due 90 days after the trust's year-end.
Can a late T3 return be penalized if no tax is owing?
Yes. An alternative penalty of $25 per day, with a minimum of $100 and a maximum of $2,500, can apply even with no balance owing.
Sources
- CRA – Doing taxes for someone who died: Capital gains / Report income — canada.ca
- Income Tax Act, s. 70(6.2) — Justice Laws (federal)
- CRA – Doing taxes for someone who died: Capital gains — canada.ca
- Income Tax Act, s. 164 — Justice Laws (federal)
- CRA – Line 25400, Capital gains deduction — canada.ca
- CRA – Filing and payment due dates — canada.ca
- CRA – Brochure: Doing taxes for someone who died — canada.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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