Deceased's Business or Rental Income on the Final Return: Canada

If the person who died ran a business, was a sole proprietor or owned rental property, the final return is more than a routine filing. The dates may differ, income has to be split between the person and the estate, and there may be optional returns worth considering.

This article walks through the main points for an executor or legal representative. It is general information, and an accountant or lawyer can confirm how it applies to the details of the business.

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

The filing deadline for self-employed people

For most deaths, the final return and any balance owing are due April 30 of the following year if death occurred between January 1 and October 31. For a death between November 1 and December 31, the return is due 6 months after the date of death.

A special rule applies if the deceased was self-employed, or if their spouse or common-law partner living with them ran a business on the date of death. For a death from January 1 to December 15, the final return is due June 15 of the following year. For a death from December 16 to December 31, it is due 6 months after death.

The extension is not available where business expenditures were mainly the cost of tax shelter investments. If a due date falls on a weekend or CRA-recognized holiday, the return is on time if received or postmarked by the next business day.

Payment is a different date

The later June 15 filing date does not push back the payment date. The payment date is still not extended. You may need to pay before filing to avoid interest.

Interest is compounded daily on unpaid amounts from the day after the due date until paid. Late filing with a balance owing carries a penalty of 5% of the balance plus 1% of the balance for each full month late, up to 12 months, and the penalty may be higher if a late-filing penalty was assessed on the deceased's return for any of the 3 previous years. Filing on time avoids the penalty even if the balance cannot be paid in full.

Splitting income between the person and the estate

Income earned up to the date of death goes on the final return even if it is received after death, unless it is filed on an optional return. Income the estate earns after death, including business, farming and rental income, is reported on the T3 return, not the final T1.

Periodic amounts such as interest, rent, royalties and annuities not paid before death are treated as accruing daily up to the date of death, and the part accruing to death is included in the deceased's income for the year of death. For rental income, this means the final return may include rent that accrued before death even though it was not yet paid.

Business receivables work differently depending on accounting method. Accounts receivable, supplies and inventory qualify as rights or things only if the business used the cash method.

Optional returns and property

Optional T1 returns are not required and may reduce or eliminate tax. They are available only for eligible income sources and time periods. Two matter most for business owners:

• Return for a Partner or Proprietor (marked 150(4)): 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. Due dates are the same as the final return.
• Return for Rights or Things (marked 70(2)): the legal representative can elect to report certain amounts on a separate return, due by the later of one year after death and 90 days after the notice of assessment for the year of death.

Form T1139 Part 3 covers businesses with a non-December 31 year-end. When claims are split, the total cannot be more than would have been allowed on one final return.

On death, each capital property is deemed sold immediately before death at fair market value, with the gain or loss reported on Schedule 3. Whether a particular business or rental asset counts as capital property depends on the facts, so it is worth confirming with an accountant or lawyer.

Property passing to a surviving spouse or common-law partner who was a Canadian resident can roll over without a gain or loss if it vests in them within 36 months of death, and the legal representative can elect out of the rollover property by property.

What to do next

• Confirm the date of death and work out which deadline applies, including the June 15 rule if it fits.
• Notify the CRA of your role as legal representative before accessing records.
• Separate income earned up to death from income earned afterward.
• Note that no instalments are required after the date of death, but instalments due before death and unpaid must be paid.
• Ask whether a partner or proprietor return or rights or things return could help.
• Keep distributions on hold until you hold a clearance certificate.

Because business and rental files vary so much, an accountant or lawyer can confirm the dates and elections before you file.

Frequently asked questions