Death of a Taxpayer
There is no official estate tax in Canadian Tax Law.
However there can be serious tax consequences on the death of a taxpayer. Here
is a brief outline of how our tax system handles the death of a Taxpayer.
Date of Death.
At the date of death Canadian tax law treats the estate
as though all of the Taxpayers assets were disposed on the exact date of death.
A T-1 tax return is completed for the Deceased as of that date but filed in the
following tax spring. There is no tax treatment of the sale of such assets as
the principle residence, the car and other personal items. However there may Capital
gains on such assets as stocks, business shares, recreational property,
investment property and many other assets. RRSP’s are deemed to be cashed in
unless there are arrangements for a tax free transfer to a surviving spouse. So
critical information will be, the
original cost of these assets and the fair market value of these assets on the
date of death. The tax issues can get quite complicated and some estate
planning before the passing away of the tax payer can be very helpful.
If the estate is simple and all assets are disposed of
immediately the whole process may be over. However the settling of the estate
may take some time and there may be income generated within the estate after
the death of the taxpayer. For example there may be interest bearing accounts
that do not get distributed for some time and therefore interest is earned. Or
possibly some real estate property takes a year to sell and it sells for
considerable more than it’s value on the day of the taxpayers death.
The estate has earned income and a T-3 Estate Trust
return must be filed and taxes must be paid by the estate. This return must be
filed by February 28th of the following year.
Once all the tax matters are supposedly handled
for the estate the Executor may want to apply for a Tax Clearance Certificate
from Revenue Canada. This Certificate
will verify that the estate has no tax liability to Canada Revenue and
therefore anything left in the estate can be distributed. This is very
important to the Executor of the estate as he or she could be personally
responsible for any further taxes owing