As the old cliché goes, the only things inevitable in life are death and taxes; and, they can happen at the same time. Today we’re going to talk about what happens when, as a taxpayer, you die. I think the biggest thing is that people are not financially prepared for death. We know it’s coming, maybe not when, but eventually we pass, and our loved ones are left to deal with your estate. It’s best to talk about it before, have your will, and ensure your wishes are met. And, of course, pay as little tax as possible.
Types of Returns
In addition to the final return, you can choose to file up to three optional returns for the year of death: return for rights or things, return for a partner or proprietor, and return for income from a testamentary trust.
Optional returns are returns on which you report some of the income that you would otherwise report on the final return. By filing one or more optional returns, you may reduce or eliminate tax for the deceased. This is possible because you can claim certain amounts more than once, split them between returns, or claim them against specific kinds of income.
Information about the deceased’s income sources will help you determine if you can file any of these optional returns. You do not report the same income on both the final and an optional return but you can claim certain credits and deductions on more than one return. You can check out this chart on CRA’s website.
On each optional return and on the final return, you can claim:
- the basic personal amount (Line 300);
- the age amount (Line 301);
- the spouse or common-law partner amount (Line 303);
- the amount for an eligible dependent (Line 305);
- the amount for infirm dependents age 18 or older (Line 306);
- the family caregiver amount for children under 18 years of age (Line 367); and
- the caregiver amount (Line 315).
You are the legal representative of a deceased person if: you are named as the executor in the will; you are appointed as the administrator of the estate by a court; or you are the liquidator for an estate in Quebec.
As the legal representative, you may wish to appoint an authorized representative to deal with CRA for tax matters on your behalf. You may do so by completing and mailing (do not fax) Form T1013, Authorizing or Cancelling a Representative.
As the legal representative, you should provide CRA with the deceased’s date of death as soon as possible. You can advise them by calling 1-800-959-8281, by sending a letter or a completed Request for the Canada Revenue Agency to Update Records form.
Under the Income Tax Act, as the legal representative, it is your responsibility to: file all required returns for the deceased; ensure that all taxes owing is paid; and let the beneficiaries know which of the amounts they receive from the estate are taxable.
As the legal representative, you are responsible for filing a return for the deceased for the year of death. This return is called the final return.
As the legal representative, you may want to get a clearance certificate before you distribute any property under your control. A clearance certificate certifies that all amounts for which the deceased is liable to us have been paid, or that we have accepted security for the payment. If you do not get a clearance certificate, you can be liable for any amount the deceased owes. A clearance certificate covers all tax years to the date of death. It is not a clearance for any amounts a trust owes. If there is a trust, a separate clearance certificate is needed for the trust.
To request a certificate, complete Form TX19, Asking for a Clearance Certificate, and send it to your regional tax services office. The addresses of these offices are listed on Form TX19. Do not include Form TX19 with a return. Send it only after you have received the notices of assessment for all the returns required to be filed and paid or secured all amounts owing.
Deemed disposition of property
When a person dies, CRA considers that the person has disposed of all capital property right before death, this is called a deemed disposition.
Also, right before death, CRA considers that the person has received the deemed proceeds of disposition (referred to as “deemed proceeds”). Even though there was not an actual sale, there can be a capital gain or, except for depreciable property or personal-use property, a capital loss.
For depreciable property, in addition to a capital gain, there can also be a recapture of capital cost allowance. Also, for depreciable property, instead of a capital loss there may be a terminal loss.
The lifetime capital gains exemption has been increased from $800,000 to $813,600 for dispositions in 2015 as the exemption is indexed to inflation starting in 2015. Since the inclusion rate for capital gains and losses is 50%, the lifetime capital gains deduction limit has been increased from $400,000 (50% of $800,000) to $406,800 (50% of $813,600) for dispositions in 2015.
For dispositions of qualified farm or fishing property after April 20, 2015, an additional deduction is available which increases the LCGE limit to $1,000,000. Accordingly, the lifetime capital gains deduction limit is increased to $500,000 (50% of $1,000,000) for those properties. This additional deduction does not apply to dispositions of Qualified Small Business Corporation (QSBC) shares.
All the above relates to RRSPs, TFSAs, non-registered shares, rental or recreational properties, business assets if a partnership or proprietorship.
Tax Credit Payments
Generally, GST/HST credit payments are issued on the fifth day of the month in July, October, January, and April. If the deceased was receiving GST/HST credit payments, CRA may still send out a payment after the date of death because they are not aware of the death. If this happens, you should return the payment to the tax centre that serves your area. CRA also administers provincial programs that are related to the GST/HST credit. If the deceased was receiving payments under one of these programs, you do not have to take any further action. CRA uses that information provided for the GST/HST credit payments to adjust the applicable credit.
Child Tax Benefit
Contact CRA at 1-800-387-1193 and let them know the date of death. If the deceased person was receiving CCTB and/or UCCB payments for a child and the surviving spouse or common-law partner is the child’s parent, CRA will usually transfer the CCTB and/or UCCB payments to that person.
If anyone else, other than the parent, is now primarily responsible for the child, that person should apply for benefit payments for the child by: using the “Apply for child benefits” online service on My Account; or completing and sending Form RC66, Canada Child Benefits Application to CRA.
If the deceased was receiving payments under provincial or territorial child benefit and credit programs administered by the CRA, there is no need to apply separately to qualify. We will use the information from the application to determine the new caregiver’s eligibility for these programs.
Net Capital Losses
Generally, when allowable capital losses are more than taxable capital gains, the difference is a net capital loss. The rate used to determine the taxable part of a capital gain and the allowable part of a capital loss is called an inclusion rate. For 2015, the inclusion rate is one-half. Therefore, an allowable capital loss is one-half of a capital loss and a taxable capital gain is one-half of a capital gain. Net capital losses cannot be carried forward from a T1 return to a T3 return.
There are two methods you can use to deal with net capital losses at the time of death.
Method A – You can carry back a 2015 net capital loss to reduce any taxable capital gains in any of the three tax years before the year of death. If you are applying it against taxable capital gains realized in 2012, 2013, or 2014, you do not need to make any adjustment because the inclusion rate is the same in all three years. The loss you carry back cannot be more than the taxable capital gains in those years. To ask for a loss carryback, complete “Section III − Net capital loss for carryback” on Form T1A, Request for Loss Carryback, and send it to your tax centre. Don’t file an amended return for the year to which you want to apply the loss.
After you carry back the loss, there may be an amount left. You may be able to use some of the remaining amount to reduce other income on the final return, the return for the year before the year of death, or both returns. However, before you do this, you must calculate the amount you can use.
From the net capital loss, you have left, subtract any capital gains deductions the deceased has claimed to date. Use any loss left to reduce other income for the year of death, the year before the year of death, or for both years.
Method B – You can choose not to carry back the net capital loss to reduce taxable capital gains from earlier years. You may prefer to reduce other income on the final return, the return for the year before the year of death, or both returns. However, before you do this, you must calculate the amount you can use.
From the net capital loss, subtract any capital gains deductions the deceased has claimed to date. Use any loss remaining to reduce other income for the year of death, the year before the year of death, or for both years. If you claim any remaining net capital loss in the year of death, you should claim it as a negative amount in brackets at line 127 – Capital Gains of the final return.
Do not use a capital loss claimed against other income at line 127 – Capital Gains in the calculation of net income for the purposes of calculating other amounts such as social benefit repayments, provincial or territorial tax credits, and those non-refundable tax credits requiring the use of net income.
When someone dies, there are a lot of things to deal with, and the taxman is one of those. CRA does recognize that you are going through a tough time after someone’s death, and can be quite helpful at such times. It’s always best to talk to a professional before dealing with the tax side of a taxpayer’s death.