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Minimize Tax at Death

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Financial Planning -> Wills and Estates -> Minimizing tax at death

How can you minimize taxes of a deceased taxpayer?

There is no "estate tax" in Canada, but when a person dies there is a deemed disposal of any capital property, so any capital gains would be taxed at this time.  This would include assets such as vacation properties and investments.  However, if the deceased taxpayer's property is being distributed to the taxpayer's spouse or to a "spouse trust", then under certain circumstances taxable capital gains, allowable capital losses, recaptures of capital cost allowance, and terminal losses may be deferred.  The deceased taxpayer's cost basis for the property would then become the cost basis for the property to the spouse.  Thus, any taxable capital gains would be deferred until the property is disposed of by the spouse.

More than one tax return may be filed for a deceased taxpayer, allowing the taxpayer's income from the year of death to be split among different returns.  One "ordinary" return would be filed for January 1st to the date of death.  This is called the final return.  There are 3 optional tax returns that can be filed as if the taxpayer is "another person".  These returns can reduce or eliminate income tax in the year of death, because certain  deductions are allowed to be claimed on the ordinary return as well as the optional returns.  These optional returns can be filed for income from:

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"rights or things" - income items that are earned, but not received at the date of death.  These rights or things include such things as:
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dividends declared but not received

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bond coupons matured but not cashed

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employment salary, commissions and vacation pay owed by the employer at the date of death, for a pay period that ended before the date of death

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unpaid employment bonuses

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CPP and OAS payments received after the date of death

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work in progress of a professional business, which has previously been excluded from the business revenue (see modified accrual basis accounting)

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a business partner or proprietor - for income from the business from the end of the business fiscal period to the date of death

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a testamentary trust - for income from the trust from the end of the trust fiscal period to the date of death

The optional returns are filed using the normal T1 personal tax return forms.  These forms can be obtained from the Canada Revenue Agency (CRA) General Income Tax and Benefit Package web page.

CRA has a web page titled "What to do when someone has died" that can provide further information.  This page has links to information on the types of returns that can be filed after a person has died.

See also the CRA publication T4011 Preparing Returns for Deceased Persons, and interpretation bulletin IT-305R4, Testamentary Spouse Trusts.

 

Revised: July 04, 2013

 

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