Executors and Income Tax
In this article we’ll look at an executor’s responsibilities under the Income Tax Act.
If you’re being considered as an executor of a will, we recommend getting legal advice before assuming the role, as it carries specific obligations under common and tax law. You should understand the nature of the role. After fully understanding the risks and responsibilities of the role, you can decide if you want to accept it. There’s no shame in saying no if you’re well-informed.
Under common law, an executor’s role is to administer and wind-up the estate of a deceased person. Generally, the deceased’s will directs the executor to pay the deceased’s funeral costs, settle their liabilities, pay their income taxes and distribute remaining assets and funds in accordance with their wishes. But before any of that can happen, most banks will require that the will be probated, which is part of the executor’s role.
Notifying the Government
If you accept the executor’s role, your first step should be to notify the Canada Revenue Agency and Service Canada because the deceased’s entitlement to Canada Pension Plan and Old Age Security payments, as well as the Goods and Services Tax Credit and similar payments, ends with their passing. As the executor, you’d be responsible for repaying any posthumous benefits the deceased received.
Income Tax Returns
You would be responsible for filing the deceased’s final income tax return and ensuring that any tax owing is paid. This includes unfiled tax returns or unpaid taxes from previous taxation years.
If the deceased passed away between Jan 1st and Oct 31st, the final return will be due Apr 30th of the following year. Otherwise, it is due six months after the date of death.
Income Tax Installments
If the deceased was required to make installment payments for the year they died, the executor is not required to pay any installments due after the date of death.
Estate’s Tax Return
The estate is taxed on any income earned from the deceased’s assets while those assets are held by the estate. If assets are sold, any resulting gains will be taxed in the estate. If assets are distributed to beneficiaries, they are generally considered to be disposed of by the estate at cost, meaning no gain or loss is realized. However, assets distributed to non-resident beneficiaries are considered disposed of at fair market value, and the estate can realize a gain or loss on such assets. Furthermore, the estate will be taxed on any death benefits received under Canada Pension Plan or under the deceased’s registered pension plan.
As the executor, you can select any date as the end of the estate’s first taxation year as long as that date is not more than one year after the date of death. Setting it a full 365 days after death maximizes your post-mortem tax-planning options.
The estate’s income tax return is due 90 days after the end of its taxation year. In addition, T3 slips are required to be distributed to the beneficiaries of the estate at that time to advise them of any taxable amounts allocated to them from the estate.
As the executor, you can be held personally liable for of the deceased’s unpaid personal or estate taxes. This liability is limited to the fair market value of any assets you distribute from the estate, so it’s critical to get a clearance certificate from the CRA before making any such distributions. This will protect you from personal liability.
When a non-resident person is named a beneficiary, it may be necessary for you to get an additional clearance certificate (known as a Section 116 clearance certificate) before making a distribution to the that person. If the assets bequeathed to the non-resident include certain types of property (e.g., Canadian real estate), the estate may be required to make a withholding from the distribution. As the executor, you should instruct the non-resident to get a clearance certificate so this withhold can be eliminated.
So, as you can see, acting as the executor of a will is more than just reading the deceased’s last wishes out loud. If you’re being considered as an executor, make an appointment with your DMCL advisor so you’re fully aware of the role and your obligations.