DEALING WITH LIABILITIES

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Debts

Finding out who the deceased owed money to generally has two aspects:

  1. looking in the deceased’ records for evidence of mortgages, loans, and accounts with outstanding charges, and
  2. publishing a notice asking for anyone having a claim against the estate to come forward.

A creditor will have 30 days[1] after publication of a notice in the BC Gazette to come forward with a claim against the estate. An executor must not distribute the estate until this period has passed and outstanding claims have been resolved.

An executor must keep in mind that debts owed by the deceased might include accounts and fees invoiced online, or by statements sent to the deceased by e-mail. If the deceased did business online, be sure to check the deceased’s e-mail and computer for evidence of online accounts.

The executor will have a duty to account[2] not only to beneficiaries but also to creditors.

The executor should not assume that a gift left in a will to a creditor pays off the debt to that creditor.

It used to be that if the will-maker owed money to a creditor but made a gift in the will that was enough to pay the debt, it was presumed that the will-maker intended that the gift would satisfy the debt. Under The Wills, Estates and Succession Act (WESA),[3] that common-law presumption no longer stands. Unless there is clear language saying that the gift in a will to a creditor is intended to satisfy the debt, the creditor could take the gift and still have a claim against the estate.

Taxes

Depending on the circumstances, you may need to deal with different kinds of tax liability. As executor, you must file certain income tax returns for the deceased and the estate. The basic filing obligations are as follows:

  1. You must file a T1 (General) return for any year before the year of death, if the deceased had not filed a return for that year and if tax is payable. Any late or unfiled returns must be filed as soon as possible. With respect to a prior year’s return where the deceased died before the normal filing deadline, the return must be filed within six months of the date of death, or the normal filing deadline, whichever is later.
  2. You must file a T1 (General) return for the year of death (January 1 to the date of death), in most circumstances. The return must be filed either six months from the date of death or on April 30 of the year following the year of death, whichever is later. If the deceased taxpayer carried on business as a proprietor or a partner in the year of death, the filing deadline would not be April 30 but June 15. As executor, you should arrange for this return to be filed as early as possible, so that you can get a Clearance Certificate from the Canada Revenue Agency (the “CRA”). The Clearance Certificate is discussed in more detail later in this chapter.
  3. You must file a T3 return within 90 days of each fiscal period of the estate. The first fiscal period begins with the date of death. You may choose the date on which the first fiscal period ends, but that date must be no later than 365 days after the deceased’s death.

Depending on the nature of the deceased’s income, the estate may be allowed to file other income tax returns, and it may be desirable for you to do so.

If you have not yet done so, retain accountants to assist you in preparing the income tax returns. If you do not have an accountant in mind, a lawyer could assist you in finding an accountant to prepare the required returns for the estate.

Estate Tax Return Information and Deadlines

As executor or administrator of a deceased person’s estate, you are the personal representative of the deceased person. Under the Income Tax Act, it is your legal responsibility to:

  • File all required tax returns for the deceased;
  • Pay all taxes owing; and
  • Inform the beneficiaries of the amounts they receive from the estate that are taxable.

Filing the Final T1 General Income Tax and Benefit Return

You need to file tax returns for any years for which the deceased didn’t file a return. If the estate earned any income after the date of death (such as rental income, or interest on bank accounts), then tax returns will have to be filed for the estate for each year after death, until the estate is wound up or paid out.

A deceased person is deemed to have disposed of most of their assets immediately before death and the resulting income, taxable capital gains, allowable capital losses, recaptured depreciation, etc. are included in the deceased’s final tax return.

Optional Return: T1 Return for Rights & Things

“Rights or things” are amounts that had not been paid to the deceased at the time of their death and that, had the person not died, would have been included in income when received. There are rights and things from employment and from other sources, including unused vacation leave paid after death, matured, uncashed bond coupons, Canada Pension Plan and Old Age Security payments for the month of death, and declared but unpaid dividends.

Filing a second T1 Rights & Things Return can minimize taxes payable by the estate as it allows income splitting at graduated tax rates.

Final Return Filing Deadlines

The deadline for filing a final tax return for a deceased individual depends on whether that person carried on a business in the year of death.

If neither the deceased nor their spouse was carrying on a business:

Date of Death: Deadline:
January 1 to October 31 November 1 to December 31
April 30th of the following year Six months after the date of death

If the deceased or their spouse was carrying on a business:

Date of Death: Deadline:
January 1 to December 15 December 16 to December 31
June 15th of the following year Six months after the date of death
Deadline for Previous Year T1 Personal Returns

If a person dies after December 31st but on or before the filing due date of the previous year’s return, if they have not filed that return, the due date for filing the return and paying any balance owing is six months after the date of death.

Deadline for Final Return (With Testamentary Spousal or Common Law Partner Trust)

If the deceased’s will creates a spouse trust, the final return may be filed up to eighteen months after the date of death.

Deadline for Separate T1 Return for Rights and Things

If there is a separate T1 return filed for Rights & Things, it must be filed by the later of one year from the date of death and the date that is ninety days after the mailing of the Notice of Assessment in respect of the final return.

Due Dates for Balances Owing

Generally, the tax owing by a deceased individual for the year of death is due on the later of 6 months after death or April 30 of the following year. So if the deceased died on December 1, 2005, and their deadline would otherwise have been April 30, 2006, you have until June 1, 2006. In addition, to the extent that the deceased has amounts included in their income in respect of rights or things or in respect of taxable capital gains or recaptured depreciation arising from the deemed disposition of capital property owned at death, the personal representative can elect to pay the tax in up to ten annual installments. The government charges interest on the unpaid tax.

Filing of T3 Trust Income Tax and Information Return

The estate must also file a T3 Trust return for income of the estate earned after the date of death. If the deceased’s will established a testamentary trust or trusts, you also have to file a T3 return for that trust or each of the trusts.

Unlike the final return noted above, which always must be filed, you may not have to file a T3 return if the estate is distributed immediately after the person dies or if the estate did not earn any income before distribution. If there is income earned after the date of death and the administration is completed in less than a year, you only need to file one T3 return covering the period of administration. If the estate administration period extends beyond one year, a separate T3 return will have to be filed for each "taxation year."

The "taxation year" of an estate is the period for which the accounts are ordinarily made up. Usually, the taxation year of the estate will end on the anniversary of the date of death or on December 31. The taxation year cannot exceed twelve months and after the year-end has been established it cannot be changed except with the permission of the Canada Revenue Agency (the “CRA”).

T3 Filing and Payment Deadlines
If estate has a non-calendar year end 90 days after the end of the estate's taxation year
December 31st year end March 31

Clearance Certificate

An executor must obtain a Clearance Certificate[4] from the Canada Revenue Agency before distributing property to any beneficiary.

Apply for a Clearance Certificate (Form TX19 - Asking for a Clearance Certificate) [5] once all of the deceased’s tax returns have been assessed. If there is a trust, a separate clearance certificate is needed for the trust. If you fail to obtain a clearance certificate before making a final distribution of the estate to the beneficiaries, and then tax is assessed by the CRA, you risk being held personally liable for the unpaid taxes, interest and penalties owed by the estate.

Usually the CRA does not give a Clearance Certificate until they are satisfied that the estate has paid any tax that is payable based on an assessment of the date-of-death tax return. You should file the date-of-death income tax return as soon as possible, so that you can request a Clearance Certificate promptly.

For more information about asking for a clearance certificate, click here.[6]

Clearance Certificate.png

The Non-Resident Beneficiary

If one of the beneficiaries is not a Canadian resident, before you distribute any estate assets to that non-resident beneficiary you should obtain legal advice. You may need to retain non-resident withholding tax or provide CRA with a certificate of compliance. While it is often the case that no actual tax is payable, there are filing requirements and deadlines that can result in penalties and interest if they are missed.

If a beneficiary might be a non-resident of Canada for income purposes, as executor you should obtain tax advice to ensure compliance with CRA. You may be required to withhold and remit taxes to CRA on behalf of a non-resident beneficiary. Failing to do so may result in your being personally liable for such taxes. The tax that a non-resident beneficiary may be required to pay on Canadian source income depends on a number of factors: for example, the tax payable will depend on whether the income is dividend or passive income, or a capital gain from disposition of Canadian real estate.

In the case of a proposed distribution to a non-resident capital beneficiary, it may be prudent for the personal representative to require the non-resident beneficiary to obtain a compliance certificate[7] before the distribution is made. A compliance certificate confirms that the taxpayer has complied with the Income Tax Act,[8] section 116, which deals with taxation of non-residents. An accountant is in the best position to advise the personal representative whether a compliance certificate is recommended.  

Request for a Compliance Certificate

ComplianceCertificate.png

Capital Gains

The Canada Revenue Agency considers that a person has sold or disposed of property just before death. This is called a deemed disposition.[9] The effect of a deemed disposition is that capital gains are calculated on the property at the date of death. Capital gains are calculated as the gain in the asset’s value from the date it was purchased. So the value of the asset at the date of death, les the cost when it was purchased, is the gain. In most cases, half the gain is taxable.

This can become a concern in cases where, for example, the deceased owned real property that has gained value over his or her lifetime and is now subject to a significant tax bill. Depending on the tax situation of the beneficiaries, there might be concerns about capital gains and ways that an accountant or a lawyer can assist in addressing tax liability.

Resources

Online Resources

Legislation

Regulations and Forms

References

  1. WESA, s. 154 [full text: http://canlii.ca/t/8mhj]
  2. WESA, s. 142 [full text: http://canlii.ca/t/8mhj]
  3. (WESA), s. 53 [full text: http://canlii.ca/t/8mhj]
  4. Income Tax Act, s. 159
  5. www.cra-arc.gc.ca[1]
  6. www.cra-arc.gc.ca [2]
  7. www.cra-arc.gc.ca [3]
  8. Income Tax Act, R.S.C. 1985, C-1, 5th Supp., s. 116 [4]
  9. www.cra-arc.gc.ca[5]
  10. www.cra-arc.gc.ca[6]
  11. www.cra-arc.gc.ca [7]
  12. www.cra-arc.gc.ca [8]
  13. canlii.ca Canada Pension Plan
  14. canlii.ca [9]
  15. canlii.ca [10]
  16. canlii.ca [11]
  17. canlii.ca [12]
  18. canlii.ca [13]
  19. www.ag.gov.bc.ca [14]