Deceased Taxpayers – Terminal T1 Returns
Some points to consider in preparing terminal T1 Returns for deceased taxpayers include:
1. If the deceased taxpayer had a qualifying mental or physical impairment in the year of death, have Disability Tax Credit (DTC), Form T2201 properly signed by the doctor and claim the DTC, either on the terminal return or on the supporting person’s return. (Section 118.3, Guide RC4064).
Usually CRA will accept a Form T2201, even if it is prepared after the death, as long as the disability was “severe and prolonged”. In most terminal returns, the DTC is accepted unless there are unusual circumstances such as a suicide or an accidental death.
2. Obtain carryforward information from CRA (multi-year data printout) by providing to CRA:
(i) Death Certificate;
(ii) Social Insurance Number of deceased taxpayer;
(iii) A copy of the Will or other document that shows the legal representative; and
(iv) The authorization Form T1013 signed by the legal representative.
If writing for this information includes the words “the Estate of the Late” in front of the deceased person’s name.
3. A GST/HST credit payment may still be sent out after the death if CRA is not aware of the death. This must be returned to CRA.
4. A terminal T1 Return will be filed manually (not EFILED) to include the income to the date of death. This must be filed by the later of 30 April (15 June if there is a business) of the following year or six months after the date of death.
Also, if there is a Spousal Trust, the due date for the terminal T1 Return is extended to eighteen months after the date of death. However, taxes must be paid by the return’s original due date to avoid interest charges.
5. Additional tax returns may be filed in the year of death to report income earned for a proprietorship or partnership which has a non-calendar year end (not too common), a Testamentary Trust with a non-calendar year end, and a “rights or things” return.
6. “Rights or things” are amounts that were not paid at the time of death and that, had the person not died, would have been included in the deceased person’s income when received. You have to reports rights or things on the “rights or things” return or the terminal T1 Return.
However, if the rights or things are transferred to a beneficiary within the time limit for filing a “rights or things” return (the later of one year after the death and ninety days after the T1 Assessment Notice), the beneficiary reports the “rights or things” on his/her return when received.
The “rights or things” return should have “Subsection 70(2)” in the top right corner of Page 1.
7. “Rights or things” include items such as:
(i) salary, commissions, vacation pay and bonuses as long as the employer owed them to the deceased on the date of death and they are for a pay period that ended before the date of death;
(ii) Old Age Security benefits due and payable before the date of death;
(iii) uncashed matured bond coupons;
(iv) bond interest earned to a payment date before death, but not paid and not reported in previous years;
(v) unpaid dividends declared before the date of death;
(vi) supplies on hand, inventory and accounts receivable if the deceased was a farmer or fisherman and used the cash method;
(vii) livestock and harvested and standing farm crops if the deceased was using the cash method (IT-234);
(viii) work in progress, if the deceased was a professional who had elected to exclude work in progress previously.
The Executor/Executrix may elect to defer the payment of this “right or thing” tax over ten years by filing Form T2075. (Subsection 159(5) of the Income Tax Act)
(See IT-212R3)
The terminal T1 Return is sent to the local Taxation Centre, the Estate T3 Return, to Ottawa and the Request for a Clearance Certificate to the local District Taxation Office. The terminal T1 Return is usually assessed within, say, six weeks and the T3 within, say, five or six months.
8. After receiving the related Assessment Notices, a Clearance Certificate on Form TX19 may be requested from the District Taxation Office to the date of death and, to the date of final distribution (Subsection 159(2); IC82-6R2)
9. Sources that may be reviewed to obtain information to complete the terminal T1 Return include previous years’ returns; safety deposit boxes; payers such as employers, banks, trust companies, stock brokers, and pension plan managers; and information slips such as T4s and T5s. Also, contact the Income Security Programs Office of Social Development Canada if the deceased was receiving Canada Pension Plan or was 65 years or older and in receipt of Old Age Security Pension.
10. Up to $10,000 of deductible/non-taxable “death benefits” may be paid to a spouse/beneficiary by the employer of the deceased in recognition of the employee’s employment services. (IT-508R; Death Benefits)
11. The up to $2,500 of CPP/QPP death benefit may be reported on either the T3 Estate Return or on the recipient beneficiary’s return. Do not report this on the deceased’s terminal T1 Return or on a “rights or things” Return.
12. Home Buyers’ Plan withdrawals that are unpaid must be included in income on the terminal T1 Return. However, if the legal representative and the surviving spouse jointly elect to have the spouse continue to make the payments, the unpaid amounts will not have to be reported in income. (Subsection 146.01(6))
Also, in most cases a Reserve for capital gains/income may not be claimed on the terminal T1 Return unless there is a transfer to a spouse, or a Spouse Trust, and an election is filed on Form T2069. (Section (72)
13. A deductible RRSP contribution may be made by the legal representative to a spousal RRSP up to sixty days after the end of the year in which the death occurred. (Subsection 146(5.1), IT-307R3
14. The spouse’s income for the whole year must be considered in determining whether a married credit is available.
The legal representative may deduct charitable donations made through the Will on the terminal T1 Return by providing an official receipt or, if the gift will be received at a later time, a copy of:
(i) the Will;
(ii) a letter on behalf of the Estate to the charitable organization advising of the gift and its value; and
(iii) a letter from the charitable organization acknowledging the gift and stating that the gift will be accepted.
Also, the charity’s registration number is needed. (Subsection 118.1(5))
15. Alternative minimum tax (AMT) does not apply in the year of death. If AMT had been paid in prior years, part or all of the AMT may be deducted from tax owing for the year of death. (Form T691; Section 127.55; IT-326R3)
16. The basic personal amount, the age amount, the spousal amount, the equivalent-to-spouse amount, additional personal amounts and the caregiver amount may be claimed in full on each return.
The disability amount, tuition and education amounts, medical expenses and donations may be split between the returns.
Canada Pension Plan contributions, Employment Insurance premiums, pension income amount, employer home relocation loan deductions, stock options, and social benefit repayments may only be deducted against their respective income.
17. There are two ways in which net capital losses incurred in the year of death may be claimed.
Method A
Carryback the net capital loss to reduce any taxable capital gains from three years before the year of death. Utilized amounts may be used to reduce other income on the final return and the previous year’s return subject to reducing the loss by capital gain exemptions claimed.
Method B
Choose to not carryback the net capital loss to reduce taxable capital gains from earlier years. You simply reduce other income on the final return and the previous return, subject to reducing the loss by capital gain exemptions claimed.
Net capital losses incurred before the year of death may be applied against taxable capital gains on the final return, other income on the final return and the preceding year’s return – subject to reducing the loss by capital gain exemptions claimed.
Net capital losses from 1988 to 2000 must be adjusted to coordinate with the 50% taxable capital gain/allowable capital loss rate for 2001 onwards.
18. A clawback of Old Age Security is based on the income on the terminal T1 Return, not a combination of the terminal T1 Return and the other returns. Also, we understand that a taxable capital gain on a terminal return which causes a clawback of Old Age Security may be considered for a Remission Order request.
19. Capital Gain Exemption
It is important to use the enhanced capital gain exemption on the terminal T1 return. This may require an Election under Subsection 70(6.2) to deem capital assets to be transferred at fair market value to a spouse, rather than the automatic rollover, to trigger the capital gain and an increase to the adjusted cost base.
This is an “all or nothing” Election on a “property-by-property” basis. For example, if the taxpayer owned 100 common shares, the Election may be made on, say, 10 common shares at fair market value and still have a rollover on the other 90. The Election should be filed with the terminal T1 Return of the taxpayer.
If the authorized capital is nominal – such as two shares, it may be prudent to amend the capital to, say, 1,000 shares prior to the death to allow more flexibility in this area.
Subsection 220(3.2) permits CRA to accept a late Election. However, a late filing penalty of $100 per month late to a maximum of $8,000 may be applied. This penalty may be eligible for cancellation or waiver under certain circumstances. (The Fairness Package, See Information Circular 92-2)
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