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 principal residences, vacation properties and investments. Any capital gain on the principal residence might be eliminated by the principal residence exemption.
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. Alternatively, by doing an election, the deemed proceeds to the taxpayer can be the fair market value of the property - in some situations this can be more beneficial. See the links at bottom to the T4011 guide for detailed information.
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:
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.
The Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) death benefit can either be included as income on the tax return of the recipient for the year in which it was received, or it can be included on the T3 return for the testamentary trust created either by the will of the deceased or by a court order. It would be included on the individual's tax return or the T3 return for the taxation year in which it is received.
The executor, trustee or administrator may be required to file a T3 return. When certain income is received by the estate after the date of death, it should be reported on a T3 return for the year in which it is received. See CRA's Chart 2 - Income reported on the T3 Trust Income Tax and Information Return.
See also: What to do When Someone Dies - links to resources for Canada and provinces/territories.
CRA Resources:- What to do when someone has died - has links to information on the types of returns that can be filed after a person has died, including
- Chart 1 - Returns for the year of death - very useful information!
- T4011 Preparing Returns for Deceased Persons - see Chapter 4 Deemed Disposition of Property for:
- Transfers of capital property to spouse or common-law partner - other than depreciable property
- Transfers of depreciable property to spouse or common-law partner
- IT-305R4, Testamentary Spouse Trusts (Archived)
Tax Tip: If your situation is at all complicated, you would be very wise to get the help of a tax professional.
Revised: March 21, 2018
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