When a person dies, the executor/administrator of the estate should arrange to file a date of death tax return on that person’s behalf. This return covers the period up to the date of death and must be filed by April 30th of the year following the date of death or six months after the date of death, whichever is later.
In addition to the date of death return, a trust return must also be filed if there is any income earned by the estate after the date of death. The trust year-end can be any chosen date within 12 months from the date of death. The filing deadline for this return is 3 months after the trust year-end.
It’s important to apply to Canada Revenue Agency for a Clearance Certificate before making a final distribution of the estate. Clearance Certificates can be obtained for the period up to the date of death and for the period from the date of death to the wind up of the trust (the date on which the remaining assets are to be distributed and the estate is no longer earning income). The bulk of the estate can be distributed prior to obtaining the final Clearance Certificate as long as sufficient funds remain to cover final taxes, accounting fees, legal fees and other miscellaneous costs that may arise. This is called an Interim Distribution and the distribution date can be used as the wind-up date for the estate for tax purposes.
Obtaining a Clearance Certificate can take upwards of four to six months. During this time, the deceased can be audited for up to five previous tax years. It’s important to obtain a Clearance Certificate before making a final distribution of the remaining funds in the estate because there could be unexpected tax liabilities including penalties and interest for which the executor may be held personally liable if there are no funds remaining in the estate. Even if an executor is certain he or she has filed the estate returns accurately, there may be errors in previous tax years that the executor is not aware of.
Canada Revenue Agency’s T3 Trust Guide is available online through their website. This informative guide contains useful information about testamentary trusts, filing deadlines and obtaining Clearance Certificates.
Deborah A. Todd
