The easiest way for surviving family members to wind up your affairs is if you have a will in place.
The will should name the legal representative who would be the executor of the will.
If there is no will, then the court will appoint an administrator as the legal representative. The legal representative can charge a fee to the estate to be compensated for the time taken to wind up the affairs of the deceased which would then need to be claimed as income in their own personal tax return.
The executor can be held personally liable for any outstanding taxes owing by the deceased’s estate.
Probate is the process of getting the court to rule that a will is legally valid. If the person dies with assets worth more than $25,000 such as land, house or investments, the will is usually required to go through probate. There are fees for the process depending on the value of the assets in the estate and the province of residence. You could probably call this estate tax.
As a legal representative, your responsibilities under the Income Tax Act are to file all the required returns for the deceased, and make sure that all taxes owing are paid. You need to inform the beneficiaries if any of the amounts that they will receive from the estate are taxable.
The first order of business is to let the Canada Revenue Agency know that the person has deceased. When this happens the CRA will remove all representatives from the deceased’s account and will stop all automatic payments such as Old Age Security.
At this time the representative needs to provide to CRA a copy of the death certificate, the SIN of the deceased, copy of the will or other legal documents such as grant of probate or letter of administration indicating who the legal representative is.
There are three kinds of personal returns that can be filed for a deceased person upon death which are the final return, the rights and things return and a business return. Under the income tax act, the deceased person is deemed to have disposed of all capital property at the time of death.
If the assets cannot be distributed on the day of death, they roll over into what is called a testamentary trust until the assets are fully distributed. This trust requires the filing of an annual tax return called a T3.
The rules around a testamentary trust have changed beginning in 2016. In the past, a testamentary trust had the same graduated tax rates as an individual. Now a testamentary trust can only use the graduated tax rates for 36 months after death. Beyond that, the trust needs to pay tax at the highest rate.
Finally after all the returns have been filed and you have received the assessment notices from CRA, and before any property is distributed, the legal representative should request a Clearance Certificate from CRA. You will need a clearance certificate for the personal returns and for any testamentary trust returns filed.
Another form of tax planning might be to divest yourself of as many hard assets as possible and give the money to the children before you die. The tax burden would fall on you, rather than your children.
Gabriele Banka is a CPA, CGA and the owner of Banka & Company, CPA. She can be reached at 250-763-4528 or firstname.lastname@example.org