Optional Returns and Rights or Things After Death in Canada

As executor, you already have a final return to file. You may have heard that more than one return can be filed for the year of death and that doing so can lower the total tax. That is true in some cases, and the extra returns are called optional returns.

This page explains what they are, when they are due and what to weigh before you decide to file one. Whether one helps depends on the deceased's income and the estate, so it is worth reviewing with an accountant.

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

What optional returns are

The legal representative may file optional T1 returns, for example a Return for Rights or Things, a partner or proprietor return, or a return for graduated rate estate income. They may reduce tax by allowing certain credits to be claimed more than once. They are not required.

The idea in plain words is that some income can be reported on a separate return instead of piling onto the final return, so that personal credits are used again against it. Which income qualifies, and how much it saves, depends on the facts.

The types of optional return

Testamentary trust income and partnership income can raise special questions about timing and who is taxed. If the estate has either, confirm the treatment with a professional before assuming an optional return is available.

Due dates and payment

An optional Return for Rights or Things is due by the later of one year after death or 90 days after the final return's notice of assessment. Tax is payable by the final return's payment date.

The final return is a separate return with its own deadlines. For a death from January 1 to October 31, filing and any balance owing are due April 30 of the year after the death. For a death from November 1 to December 31, the final return is due 6 months after the date of death.

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

Late filing with a balance owing carries 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. Because the optional return's tax is payable by the final return's payment date, filing the optional return later does not push back that payment.

Weighing whether to file one

• Check whether the deceased had income that could be split off onto a separate return.
• Compare the total tax with and without the optional return, since the saving comes from claiming certain credits more than once.
• Remember that the return is optional, so it should be worth the added preparation.
• Consider other planning tools on the final return, such as the legal representative's election to opt out of the spousal rollover, which is made property by property.

What to do next

• List all income the deceased was entitled to at death, including any business or partnership interests.
• Ask an accountant to model the final return alone and with each optional return.
• Mark the optional return deadline: the later of one year after death or 90 days after the final return's notice of assessment.
• Set aside funds for tax by the final return's payment date.
• Obtain a clearance certificate before distributing estate property, since a representative who distributes without one can be personally liable.

Frequently asked questions