Splitting a Plumber's Final Tax Bill Between Two Returns

The situation

Imran ran a one-man plumbing business out of Cornwall for close to twenty years. He owned his van, a modest inventory of tools and fittings, and had roughly $40,000 in unpaid invoices out to customers when he died suddenly of a heart attack at 54. His wife, Fatima, a registered nurse, was named executor of his estate. His younger brother, Dov, a beneficiary under the will and named as co-executor, worked construction and had no background in tax or estate administration.

Under the Income Tax Act, a person who dies is treated as having a final taxation year that ends on the date of death. Their executor must file a terminal return reporting all income earned up to that date, plus a deemed disposition of most capital property the person owned — meaning the estate is treated, for tax purposes, as if it sold everything at fair market value immediately before death, even though nothing actually changed hands. For a self-employed tradesman with outstanding invoices and business equipment, that combination can produce a tax bill that looks nothing like what the person actually earned that year.

Fatima came to Treadstone Law about six weeks after the funeral, once the accountant handling the terminal return had produced a rough estimate: somewhere between $50,000 and $150,000 owing, depending on how a handful of decisions were made. Dov, worried the estate's tax bill would eat into what little cash was left for distribution, wanted answers before he would sign anything as co-executor.

What the numbers were doing

Two features of Imran's estate were driving the size of the bill.

First, the unpaid invoices. As a sole proprietor reporting income on a cash-and-accrual mix typical of small trades, Imran had roughly $40,000 in work he had completed but not yet been paid for at the date of death. Ordinarily, amounts like this — sometimes called "rights or things," a category that also covers unpaid wages, uncashed matured bond interest, and similar amounts owed to a person at death — get pulled into the terminal return and taxed at whatever bracket the person's total terminal income lands in. Combined with Imran's regular income for the part-year, that pushed a meaningful slice of the invoice income into a higher marginal rate than it would ever have faced if he had lived to collect and report it normally.

Second, the deemed disposition of his tools, equipment, and van. Capital property owned at death is deemed sold at fair market value immediately before death, triggering a capital gain (or loss) even though the estate hadn't sold anything. Because Fatima was Imran's spouse, the estate had access to a spousal rollover: capital property left to a surviving spouse, or to a spousal trust, can transfer at the deceased's original cost rather than at fair market value, deferring the gain until the spouse actually disposes of the property later. Left on autopilot, an estate's executor might assume the rollover always applies automatically and always helps. Neither assumption was quite right here.

Dov's objection wasn't unreasonable on its face: he'd heard that estates could "elect their way out" of tax, and wanted to know why the estate wasn't doing more of that. The honest answer was that some elections would help, others would only shift the burden between Fatima and the estate's other beneficiaries, and one option Dov had read about online didn't apply to this estate's facts at all.

What we did

1. Reviewed the terminal return with Imran's accountant rather than displacing them. Our role was the legal and elections side — reading the return, identifying which choices were available under the Income Tax Act, and advising the two executors on what each choice meant for the estate and for each of them personally. The accountant kept preparing the numbers; we did not duplicate that work.
2. Recommended the rights-or-things election for the unpaid invoices. The Income Tax Act allows an executor to elect to report certain amounts owed to the deceased — including uncollected trade receivables of a sole proprietor in some circumstances — on a separate return, filed alongside the terminal return, rather than folding them into the terminal return's income. A separate return gets its own set of graduated tax brackets and personal credits, the same as if it belonged to a different taxpayer. Splitting roughly $40,000 of invoice income onto its own return, instead of stacking it on top of Imran's regular part-year income, kept a real portion of it out of the higher brackets it would otherwise have hit.
3. Tested the spousal rollover against a partial election out of it. The Income Tax Act lets an executor elect, property by property, to opt out of the automatic spousal rollover and instead report the deemed disposition at fair market value. That sounds like it only creates more tax — but Imran's estate had capital losses available from an earlier, unrelated investment that had lost value years before. Electing out of the rollover on the van and tools let the estate realize a capital gain on paper and immediately offset it with those existing losses, clearing tax that would otherwise have sat unused. The remaining property — mainly Imran's RRSP, left to Fatima — stayed on the rollover, deferring that tax until she eventually drew on it.
4. Modelled both scenarios in dollars for both executors. Rather than asking Fatima and Dov to trust an explanation of tax mechanics, we set out, side by side, what the estate would owe under the accountant's original approach versus the elections we were recommending, and who bore the difference — since some savings flowed to Fatima's personal deferral and others reduced the pool available to all beneficiaries, including Dov.
5. Negotiated the split with Dov directly. Dov's real concern was fairness between what he received as a beneficiary and what Fatima kept through the spousal deferral. We proposed, and the accountant confirmed workable, an adjustment to how the estate's remaining cash was distributed to account for the fact that Fatima's deferred RRSP tax would eventually come due against her, not against Dov's share. That reframed the disagreement from "is the estate paying too much tax" to "is the split between us fair," which was the question actually dividing them.

The outcome

The rights-or-things election and the partial election out of the spousal rollover, filed together, brought the estate's combined tax bill from the top of the original $50,000–$150,000 estimate down to roughly $78,000 — still a real cost, but closer to what Imran's actual part-year income and modest estate justified than the original all-in-one approach. Fatima's RRSP passed to her on the rollover, deferring that portion until she withdraws from it, while the van and tools were reported at fair market value and largely sheltered by the estate's existing capital losses.

The distribution adjustment Dov and Fatima agreed to wasn't a clean fifty-fifty split — Dov ultimately accepted a somewhat smaller immediate distribution in exchange for a written accounting of how the deferred RRSP tax would be handled if Fatima drew it down within a set number of years, with a top-up owed to the estate's other beneficiaries if she did. Neither side got exactly what they first asked for. Fatima had wanted the rollover applied to everything, including the van and tools, on the theory that any deferral was automatically better; Dov had wanted no rollover at all, worried it let Fatima keep tax-free value he couldn't touch. What they settled on used the rollover only where it made mathematical sense and left it out where existing losses could absorb the gain instead — a compromise driven by the numbers rather than by either executor's starting position.

Probate — the court process confirming a will and an executor's authority, which in Ontario carries its own estate administration tax calculated on the value of the estate — had already been applied for before Fatima came to us, so it proceeded on a separate track. The elections did not affect probate value, only the income tax owed on the estate's final return.

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