Rights or Things Return: Optional Extra Returns for a Deceased Person

When someone dies, the executor must file a final income tax return. Many people do not realize that the law also allows some optional extra returns. Used well, they can change how the deceased's income is reported, and in some estates that can reduce the total tax.

This article explains the best known of these, the rights or things return, and points out the other elections and timing choices that executors commonly hear about. It is general information for Ontario executors, not a substitute for an accountant who can see the full file.

What the rights or things return is

Whether a particular item counts as a right or thing is a technical question, and it is one to confirm with an accountant rather than assume.

Under section 70(2) of the Income Tax Act, the legal representative may elect to file a separate return for these items. On that return, the unrealized rights or things are treated as income of another person, rather than being added to the deceased's final return.

The election is optional. The point of the election is to give the executor a choice, and the right choice depends on the size of the amounts and the rest of the deceased's income.

Deadlines for the optional return

The election is due by the later of one year after the date of death or 90 days after the notice of assessment for the final return. CRA describes the same deadline for the optional Rights or Things return, and says payment is due by the final return's due date, which is generally April 30.

That payment point matters. A later filing deadline for the optional return does not push back the date the tax is due, so interest and penalties can still be a concern if the payment is late.

If the deceased or their spouse was self-employed, the final return is due June 15 of the next year when death was between January 1 and December 15. A late final return with a balance owing carries a 5% penalty plus 1% for each full month, up to 12 months, and compound daily interest.

Why handing out assets too early can cost you the election

If rights or things are distributed to the beneficiaries before the election deadline, the election no longer applies. Each beneficiary then reports the amount in their own income when it is realized.

This is a practical trap. Executors are often pressed by family to pay out quickly, and a distribution made without thinking about this rule can close off an option. Check with your accountant before any distribution that might include unpaid amounts owing to the deceased.

Other choices that work like extra returns

The rights or things return is not the only place where an executor has choices. Several others can affect the total tax.

• Estate year-end: the first T3 return of a graduated rate estate can have a tax year-end set at any date up to one year after death, and the T3 is due 90 days after that year-end. A testamentary trust that is not a graduated rate estate has a December 31 year-end.
• Graduated rate estate status: the estate must arise on and because of the death, be a testamentary trust, designate itself in its first return ending after 2015, and be the only estate so designated. It qualifies for no more than 36 months after death.
• Capital losses: where a graduated rate estate disposes of capital property at a loss within its first three taxation years, the representative can elect to treat part of those losses as the deceased's capital losses in the final year, and must amend the final return. The election must be made in the prescribed form by the estate's filing-due date. The version of this rule in force and its date limits should be rechecked with an accountant before you rely on it.
• Net capital losses on the final return can reduce income other than capital gains, which is not the case in other years. Capital losses on personal-use property generally cannot be claimed.
• Spousal rollover: property passing to a Canadian-resident spouse or common-law partner, or to a qualifying spousal trust, is deemed disposed of at adjusted cost base, and the representative can elect out of that treatment.

What to do next

Start early. The elections above have deadlines tied to the date of death and to the notice of assessment, so a calendar is useful from the first month.

• Note the date of death and work out the final return due date.
• List income the deceased had earned but not yet received at death, and ask an accountant whether it may qualify as rights or things.
• Hold off distributing assets that might be rights or things until the election has been considered.
• Ask your accountant to prepare the final return both with and without the separate return so you can compare the tax.
• Diarize the later of one year after death or 90 days after the notice of assessment.
• Keep copies of everything filed and speak to a lawyer if beneficiaries question your choices.

Frequently asked questions