Which Estate Assets Pay the Deceased's Income Tax in Ontario?

A common surprise for families is that the deceased owed income tax, but the will leaves the house to one child, the investments to another and a few cash gifts to others. Where does the tax money come from, and does it come out of everyone's share equally?

This article explains which taxes can arise, how they are reported, and the steps that protect the executor. It also explains honestly where the answer depends on the will's wording, because that is the part families most often argue about.

Who deals with the tax

An executor winds up the deceased's affairs by paying taxes, bills and debts, collecting assets and distributing the rest. Early duties include filing the deceased's tax return and telling banks and financial institutions of the death.

Costs of tax filing, legal work and property maintenance are paid from the estate as expenses. In other words, the executor is not meant to pay the deceased's tax from their own pocket. The tax is a debt of the estate.

The different taxes that can arise

It helps to separate the taxes, because the amounts are often different in size and are reported in different places.

The deemed sale at death is often the largest piece. 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 instead, and it must vest indefeasibly within 36 months of death. The representative can elect out of that treatment.

Specific gifts and the question of who bears the tax

When a will leaves particular assets to particular people, the estate may not have enough cash left over to pay the tax without selling something or reducing someone's gift. Which beneficiary's share absorbs the tax depends on how the will is worded and on the facts of the estate.

This is an area where the answer truly depends on the facts. A will may say which assets should pay the taxes, or it may say nothing. Different outcomes can follow, and beneficiaries whose gifts are reduced sometimes disagree. A lawyer should read the will before the executor sells anything or makes a distribution.

Assets that pass outside the estate, such as joint bank accounts and accounts with a designated beneficiary, generally do not go through the estate. Whether and how they contribute to a tax bill raises its own questions and should be checked with a lawyer or accountant rather than assumed.

Protecting yourself before you distribute

Distributing estate assets before getting a CRA clearance certificate makes the representative personally liable for unpaid tax up to the value of the assets distributed. The application uses Form TX19, plus GST352 if the deceased had a GST/HST number.

CRA expects you to apply only after returns are filed, assessed and paid. It acknowledges applications within 45 days and may take up to 120 days. That timing affects when beneficiaries can expect their final share, so it is worth explaining to them early.

• Late filing of a final return with a balance owing carries a 5% penalty plus 1% per full month, up to 12 months, and compound daily interest.
• A T3 return is generally required when estate income exceeds $500, or more than $100 is allocated to any one beneficiary.
• Estate income paid or payable to beneficiaries is generally taxed to them, and income the estate keeps is taxed in the estate unless a designation is made.

What to do next

• Get a copy of the will and any codicils, and read what it says about debts and taxes.
• List every asset, noting which ones pass through the estate and which pass outside it.
• Work out the final return due date for the date of death.
• Ask an accountant to estimate the tax on the final return, including any deemed sale.
• Check whether there is enough cash in the estate, before promising any specific gift to anyone.
• Do not distribute until you have considered a clearance certificate.
• Speak to a lawyer if the tax will reduce some gifts more than others.

Frequently asked questions