Who Files Tax Returns for Deceased Relatives?

The legal representative is the person responsible for filing a tax return for the deceased. In most cases, this is the executor of the will, as Brougham states. The court appoints an administrator — often a spouse or next of kin — when the will does not name an executor or there is no will at all. In Quebec, a liquidator acts as the legal representative, acting as either executive or administrator depending on the terms of the will.

As the legal representative, it is your responsibility to notify the Canada Revenue Agency, by phone or by mail, of the date of death as soon as possible. You also provide the CRA with a copy of the death certificate and a complete copy of the will. The CRA says you should send this information in right after the passing or with the deceased’s tax return. It is your duty as the legal representative to make certain all taxes owed are paid and also to inform beneficiaries of any taxes they are required to pay in association with the estate.

A clearance certificate is a document the CRA provides to the legal representative showing tax debts are paid and you can go ahead and begin distributing assets as per the will. If you don’t wait for a clearance and the deceased owes taxes, you may be held liable for those amounts.

For tax purposes, the CRA looks at the death as though the deceased sold all of his capital property right before he died, even though nothing was actually sold. Brougham says you take the fair market value of assets at the date of death to calculate the value of the property. The fair market value is the highest going rate that an asset would sell for at a given time. If the fair market value of the property is higher than the amount paid to obtain the property, this is a capital gain. If it is the contrary, it is a capital loss.

A final return is required for the deceased. On the final return, you must include all sources of income, including employment income, investment income and foreign income. You must also include any capital gains on assets. “(The final return) goes hand in hand with the will,” Brougham says. “Canada has no estate inheritance tax; taxes are paid on the return.” When people inherit assets from an estate, generally they do not have to pay taxes on these assets. However, taxes may reduce the value of the estate and, therefore, reduce the amount of inheritance. You can reduce the deceased’s tax liability by taking advantage of any applicable tax credits and filing one or more of the optional tax forms.

A return for rights or things allows you to separately file some of the deceased’s income receivable on a separate return. This is income that had not yet been received at the time of death, but if the deceased were still living, it would have been tabulated in with income upon its arrival. Vacation pay or a bonus that had not been received before the date of death may apply as this type of income.

A return for a partner or proprietor allows you to separately claim the deceased’s business income if she passed before the end of the calendar year but after the end of the business’s fiscal year. Any income earned after the end of the fiscal year may go on this return.

You can file a return for income from a testamentary trust if the deceased passed before the end of the calendar year but after the fiscal year end for the trust. You may include income earned after the fiscal year end on this return.

The benefit to these returns is that you can claim certain tax credits on each of them, as well as the final return. Generally, this reduces overall taxable income and, therefore, reduces tax liability.