When a person passes away, his or her executor or estate administrator is required to file a final income tax return. It is important to ensure that any outstanding tax returns from previous years are also completed and filed. Failure to file previous returns may result interest or penalty charges. The executor is also required to advise the Canada Revenue Agency (CRA) of the deceased’s date of death.
Executors are also required to file a tax return for the estate itself called the terminal tax return or a T3. Typically, interest earned on cash held in bank accounts, dividends received on stocks or mutual funds or business income are reported on a T3.
Dates for filing the terminal tax return is determined by the person’s date of death. If the person’s death occurred between January 1st and October 31st, the executor has until April 30th of the following year. If the death occurred between November 1st and December 1st, it is due six months after the date of death.
If the deceased owned foreign property, received foreign-sourced income or lived outside of Canada part-time, you may also need to file a separate foreign tax return.
In situations where the estate carries on for several years, a T3 return must be filed for each year. When the estate is wound up and all of the assets have been distributed to the beneficiaries, the executor should request a Tax Clearance Certificate from the CRA to show that all taxes owing by the estate have been paid. This is also treated as written confirmation that all tax liabilities for the estate have been paid and there are no outstanding balances remaining. It is important to wait until after you obtain the Tax Clearance Certificate to distribute estate assets, as the executor can be held personally liable for any future taxes.