Minimize Tax of Deceased Taxpayer

You can’t escape your tax obligations even in death.  That holds true even if we don’t have estate tax here in Canada – when a taxpayer dies, there is deemed disposal of any capital property, so any capital gains will be taxed at that time.

But in cases where the property is distributed to the remaining spouse or to a spouse trust, taxes on capital gains can be deferred until the property is disposed of by the remaining spouse.

In addition to the final return, the remaining spouse or legal representative can choose to file up to three optional returns for the year of death.

Information about the deceased taxpayer’s income sources will help to determine if any of these optional returns can be filed.  Please note that the same income is not reported on both the final and an optional return but certain credits and deductions can be claimed on more than one return.

These optional returns can be file for income from:

  • Rights or things – income items that are earned, but not received at the date of death

  • A business partner or proprietor – for income from the business from the end of the business fiscal period to the date of death

  • A testamentary trust – for income from the trust from the end of the trust fiscal period to the date of death.

Although the additional returns are optional, there may be a tax advantage if these are filed because certain deductions are allowed to be claimed on the final return as well as the optional returns.

UPDATE on the returns for deceased individuals:

Under proposed changes, for deaths occurring after March 3, 2010, the existing RRSP rollover rules will be extended to allow a rollover of a deceased individual’s RRSP proceeds to the RDSP of the deceased individual’s financial dependent infirm child or grandchild.

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