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. There
are 3 additional 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:
- "rights or things" - income items that are earned, but not received at the date of death. These rights or things include such things as: dividends declared but not received
- Bond coupons matured but not cashed
- 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
- Unpaid employment bonuses
- CPP and OAS payments received after the date of death
- A business partner or proprietor - for income from the business from the end of the business fiscal period to the date of death
- 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.