The Final Estate Tax Return is a tax return that is filed by the executor of an estate on behalf of the deceased person. This return reports the deceased’s income and assets, as well as any transfers to estates and a number of other taxes and issues.
A deceased’s final income and asset return must be filed in the year of death by the executor or other person appointed by the courts to administer affairs on behalf of the deceased. This return may include information such as the total income received and amounts paid out to beneficiaries during the last year of the deceased’s life.
It is also possible to claim some deductions that are not on a deceased’s final return. These deductions are based on certain types of income and assets. They can be helpful to the estate or to the surviving spouse.
In some cases, a decedent’s final return might include earnings on savings or investments that accumulate after the date of death. This type of income is often referred to as “income in respect of a decedent” and is taxable either to the estate or to the beneficiary who receives it.
However, this is not always the case. It depends on how the decedent’s income was recorded during the time they were living and what method of accounting they used.
For example, the cash method of accounting would count earnings on money-market mutual funds as a right of distribution to the beneficiary. On the other hand, if the decedent’s income was accumulated through investments in real estate, stocks, or bonds and the value of these investments increased between the date of death and the date they were distributed to beneficiaries, these investments would be reported on the decedent’s final income and asset return as taxable income.
The same applies to any other types of assets that are not reported on the decedent’s final return. These include some death benefits, such as Canada or Quebec Pension Plan death benefits, and amounts from RRIFs and trusts.
In addition, if the decedent had been a resident of Canada for part of the year of their death, they may have to prorate their personal amount – a measure of their gross annual net income – between January 1 and the date of their death. If so, you need to complete Form T4055 – Newcomers to Canada in order to claim this amount.
Generally, the CRA accepts this form but it may take up to 18 months to process it. If a taxpayer affirmatively files it with a closing letter, the service is more likely to accept it quicker and process it more quickly.
There are also a number of other optional returns that the decedent’s legal representative can file on the decedent’s behalf, including a T3 Trust Income Tax and Information Return and up to three T1 Trust Estate Returns. In many cases, these optional returns can be more beneficial than filing a final return for the deceased because they are often tax-free or have lower tax rates. The legal representative should make sure that they file the appropriate returns for the decedent’s estate and that they consider all tax elections that are applicable to the estate.
