Paying the Final Tax Bill When the Estate Has No Cash in BC

Many estates are rich on paper and short of cash: a home, a cottage, a business or a registered plan, and little in the bank. Then a tax bill arrives that the estate cannot easily pay.

This article explains why those bills happen, which deadlines matter, and what options you can look at with a lawyer or accountant. How CRA payment arrangements and creditor priority work in a given estate depends on the facts, so those points are best confirmed with a professional.

This article covers the law of British Columbia.

Why the bill can be large

Under the Income Tax Act, a taxpayer is deemed to have disposed of each capital property immediately before death for proceeds equal to its fair market value. The CRA describes this as the deceased being considered to have sold everything just before death, even though no sale took place.

The gain is reported on Schedule 3, and the taxable portion goes into income on the final return. The final return reports all income from January 1 of the year of death up to the date of death.

• An unmatured RRSP is included in the deceased's income at its fair market value, unless it passes as a tax-deferred refund of premiums to a qualifying beneficiary.
• Under a RRIF, the fair market value at death is included in income unless a spousal rollover applies.
• A rental property or vacant land is not treated as a principal residence.
• A cottage used for personal enjoyment is personal-use property, and a loss on it cannot be claimed.

Deadlines, interest and penalties

For a death between January 1 and October 31, the final return is due April 30 of the following year. For a death between November 1 and December 31, it is due 6 months after the date of death, and any balance owing is due then too.

If the deceased or a spouse or common-law partner living with them carried on a business, the filing date can be later, but any balance owing is still due on the regular payment date and interest accrues from the day after.

A late return can bring a penalty of 5% of the balance owing plus 1% for each full month late, to a maximum of 12 months. Compound daily interest applies to unpaid amounts and penalties. The CRA may cancel penalties or interest where the lateness was due to circumstances beyond the person's control.

Because interest builds, file on time even if you cannot yet pay in full, and talk to your advisor early.

Ways the bill may be reduced or deferred

If total RRSP distributions are less than the value included in the deceased's income, the legal representative can request a deduction of the difference, generally if the final distribution happens by the end of the year after death.

Net capital losses on the final return can offset income other than capital gains, which is unlike other years.

Selling assets and who gets paid first

When the estate has no cash, selling an asset is often how the bill is paid. That can change the tax picture and the timing, so talk to an accountant before listing anything.

Which debts rank ahead of others, and whether the CRA will agree to a payment arrangement, depend on the facts of the estate and are worth confirming with a lawyer. What we can say is that distributing to beneficiaries before tax is dealt with is risky. Without a clearance certificate, a representative can be held personally liable for tax owing, up to the value of the assets distributed.

Also remember other costs. BC probate fees are based on the gross value of the estate, which includes BC real and tangible personal property.

What to do next

• List the estate's assets and their values at the date of death.
• Work out which assets trigger tax on the final return, and which pass to a spouse or common-law partner.
• Note the final return and payment dates for the date of death.
• Notify the CRA of the death.
• Ask a lawyer or accountant about payment arrangements, asset sales and the order of paying debts.
• Do not distribute until tax is dealt with, and consider a clearance certificate on Form TX19.

Frequently asked questions