Employment Income up to the Date of Death
Income from salary or wages from January 1st up to the date of death must be reported in the deceased’s final income tax return. This includes any accrued employment income as well as vacation pay that may be owing to the deceased’s estate or beneficiaries.
Pension Benefits
Pension income received by the deceased during the period January 1st to the date of death must also be reported in the deceased’s final income tax return for the stub period.
Accrued Income up to the Date of Death
Most kinds of accrued but unrealized income as of the date of death must be reported in the deceased’s final stub period income tax return. For example, this would include any accrued interest income on government or corporate bonds owned by the deceased covering the period from when the interest was last paid on the bond, up to the date of death.
Deemed Disposition of Assets for Capital Gains Tax Purpose s
One of the most unusual features of the Canadian income tax system is the way in which accrued, but unrealized capital gains at the time of death are subjected to tax.
Capital Losses
Normally, capital losses realized on the sale of investments can only be offset against capital gains. In the case of a deceased taxpayer, capital losses can be deducted from other income. However, the ability to do this may be limited, if the deceased previously claimed a lifetime capital gains exemption.
RRSPs and RRIFs
Another way in which estate tax arises at the time of a person’s death is that the full value of a person’s Registered Retirement Savings Plan (RRSP) and Registered Retirement Income Fund (RRIF) investments must be reported as income in the deceased’sfinal income tax return.
RRSP Contribution for the Year of Death
More often than not, the deceased will not have made an RRSP contribution for the current calendar year in which he or she died. Also, depending on the time of year, an RRSP contribution may not have been made for the previous calendar year.
RRSP Home Buyer’s Loan
The Federal Home Buyer’s Plan allows people to borrow from their RRSP in order to help finance the purchase of a home, provided that certain repayment conditions are met. Any balance of such a loan that is unpaid at the time of a person’s death must be included in the deceased’s income in the final return, unless a surviving spouse agrees to assume the liability.
Charitable Donations
Donations to registered charities, universities and hospitals that are made under a person’s will are treated for income tax purposes as if the deceased had made such donations “immediately before death.” This means that such donations qualify for a donation tax credit in the deceased’s final stub period income tax return.
Medical Expenses
Medical expenses incurred in the 24 months preceding the date of death may be claimed in the final income tax return, provided they have not already been claimed.
Personal Tax Credits and Exemptions
The full personal tax credits and exemptions normally claimed by the deceased can be taken in the final stub period return (and in any additional elective returns), even though the time period covered by the return(s) is less than a full year. Fortunately, there is no requirement to pro-rate the personal credits etc. based on the number of days from January 1st to the date of death.
Disability Tax Credit or Deduction for Attendant Care
If you are the executor for someone who died after a serious or prolonged illness, it may be possible to claim a disability tax credit in the final return, and possibly in the return for one or two preceding years. To qualify for the credit, the individual’s ability to perform an activity of daily living has to have been markedly restricted all or almost all of the time.
Income Taxes Owing on Capital Gains Resulting from the Deemed Disposition
A large amount of income tax may be owing on the deceased’s final income tax return as a result of the deemed disposition of assets owned by the deceased at the time of death. For example, the deceased may have owned shares of a private company whose fair market value was significantly greater than the adjusted cost base of such shares.
If they wish, the executors can elect to spread the resulting “capital gains tax” over a 10-year period, provided that acceptable security for the unpaid tax is posted with the CRA. This tax deferral is no bargain, because the CRA will charge interest on the unpaid portion of the income tax from year-to-year, and such interest is not tax deductible. However, where there is not enough cash or other liquid assets in the estate to cover the tax liability, it may be the only sensible course of action.
