Income taxes are divided into 2 time periods after someone’s death: the last tax year before someone’s death and the period after someone’s death. The period before someone’s death is covered by the final declaration. The final return is like any other tax return, but there are special rules regarding charitable donations, capital gains, medical expenses, and other claims that are slightly different than a regular return since there will be no future opportunities to “resolve” the claims. or defer income taxes The purpose of the final return is to settle all taxes owed during someone’s lifetime that have not yet been taken care of. For example, if you buy stock or property and have not yet made a capital gain, the property will be considered sold on the day of death and income taxes will be due. If you deferred taxes through an RRSP and did not withdraw the funds before the day of death, taxes are due on the day of death on all money that was subject to the tax deferral. This is why the tax rates on RRSPs can be high if the account sizes are large and there are no other factors to consider. Tax deferral in non-tax jargon means delay: the delay is in effect until the strategy is undone on the day of death. If you have transferable credits such as tuition, capital losses, unclaimed gifts, or medical expenses, these are also settled or used on the day of death. There are situations in which some of these claims may be addressed in the statement of estate. Professional probate advice should be consulted regarding potential tax returns to ensure that the best case scenario is presented.
For the period after death, there is an optional return called “Return of Rights and Things”. These are only sources of income that were in the process of being paid before death but were not paid until after death. Examples of this are dividend income that was declared (owed to the deceased) before the day of death, but was actually paid after the day of death. Other examples are vacation pay earned before death and not yet paid, employment income earned before the day of death but not yet paid, increased but unpaid bond interest, increased OAS payments or the work in progress for a self-employed person. Only a limited number of things (no pun intended) can be included in this return, but this is a possibility.
The estate statement or T3 statement deals with income that is generated and occurs after death. These would be the changes in the value of the income or assets between the day of death and the day of the distribution. As an example, someone owned 100 Bell Canada shares worth $5,000 on the day of death, these shares would be “deemed sold” as of the day of death under tax rules. The shares are not actually sold and would remain in the estate account until the executor/executor sold them. If this happened 1 year later, for example, the shares may be worth $6,000 on the actual day of the sale. This means that there is an additional $1,000 capital gain that would occur on the return of the estate ($6,000 – $5,000) that would be income to the estate. The same can happen with real estate, collectibles, or changes in account valuations after the day of death.
The largest sources of taxes for the final return are money that has earned income and has not paid income tax for many years. The RRSP is a classic example of this, as is a lump sum pension payment on death. Periodic payments are taxed annually, so the tax impact will not be as pronounced. RRIF accounts would also fall into the category of potentially high tax collection, as they are extensions of the RRSP. Unregistered investments with large unrealized capital gains would also face a large tax bill. Large unrealized capital losses would reverse this effect and be a source of tax savings. Real estate tends to have large built-in capital gains due to being held for long periods of time. The home in which a person lives (primary residence) is exempt from tax on the final return if he has lived in it for as long as he has owned the home. The problem is that some small amounts of tax may be owed from the date of death to the date of distribution on the estate statement for capital gains accumulated during this period. Investment properties would also be subject to capital gains or losses.
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