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Handling Estate Related Income Tax Returns

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When it comes to acting as executor of an estate, there is no shortage of responsibilities that should be carefully reviewed prior to accepting the role. One of the most fundamental duties is that all estate related income tax documents are filed and in good standing.

The executor has a legal duty to file the tax returns for both the deceased and the estate. This involves filing the T3 final return which reports all income earned after the date of death, as well as any returns for previous years that were not filed by the deceased. Furthermore, the executor must ensure that all outstanding tax liabilities are paid. If the return is filed late, penalty fees may be charged. This duty to attend to estate income tax filings and payments is of great significance to an estate administration as failing to do so can result in the executor incurring personal liability pursuant to the Income Tax Act (the “ITA”).

It is also important to be aware of the deadlines for the filing of the T3 return as they fluctuate depending on the date of death. For instance, if the deceased died between January 1st and October 31st, the deadline would be April 30th of the following year. However, if the date of death occurred between November 1st and December 31st, the deadline would be six months from the date of death. In most cases, it is in the best interest of the executor to file the returns as early as possible rather than wait until the deadline approaches, as missing the deadline may inadvertently risk incurring personal liability.

In some cases, an executor may wish to obtain a Clearance Certificate from the Canadian Revenue Agency (the “CRA”). A Clearance Certificate is a document that is issued by the CRA stating that all taxes, interest, and penalties have been paid, or that the CRA has accepted security for the payment. It is important to note that the Clearance Certificate only covers tax years up to the date of death. This means that it does not provide clearance for income earned by a trust after the date of death. Although a Clearance Certificate is not required, it is often sought prior to the distribution of estate assets to insulate the executor from personal liability with respect to the deceased’s income tax. 

Another important issue to address is the scenario in which the executor discovers that the deceased filed incorrect information in a previous year’s return, either inadvertently or intentionally. In these cases, the executor would be wise to tread carefully, as turning a blind eye to past discrepancies may trigger personal liability for the penalties and interest accrued.

Fortunately, the Voluntary Disclosure Program (the “VDP”) has been developed by the CRA as a mechanism to provide taxpayers with the opportunity to come forward and correct such past  errors or omissions without being subject to the penalties (or prosecution) that might normally apply. In the case of an executor administering an estate, the VDP can be used for similar purposes.

In order to benefit from the penalty and interest exemptions, the disclosure under the VDP must meet the following four criteria. The exemptions are not automatically granted and each request is subject to review on its own merits:

  1. The disclosure must be voluntary. This means that it must be made prior to becoming aware of any compliance actions being taken by the CRA;
  2. A penalty would normally apply;
  3. The disclosure must be complete; and
  4. The information being disclosed must be at least one year past due.

It is also important to note that disclosure under the VDP can be made anonymously (commonly referred to as no-name disclosure). No-name disclosure is often preferred as it provides the executor (or taxpayer) the opportunity to discuss the facts and tax issues with the CRA while remaining protected from penalties (or prosecution). However, a binding agreement cannot typically be made under the no-name process. The executor (or taxpayer) is given 90 days to release the name that would result in a further extension to submit any (amended) tax filings. Under a named VDP disclosure, the taxpayer is identified immediately, which prompts the CRA to allow 90 days to submit any additional materials.

On another note, many people are more frequently making use of charitable giving due to the associated tax benefits. The key to making the most of your charitable giving is to ensure that you receive good professional advice beforehand. This is because the types of assets a testator may have can vary significantly from person to person. Depending on the type of assets one possesses, there are different mechanisms that can be used to limit the tax liabilities payable by his or her estate.

For instance, a testator may opt to leave assets directly to a charity or may instead consider setting up a charitable trust. At the end of the day, the point of the charitable gift is for it to be as advantageous as possible to both the testator and the charity. For this to be possible, it is important to ensure that the best possible method in making the gift is being used, which will vary depending on personal circumstances.    

 

 

Ian Hull and Suzana Popovic-Montag are partners at Hull & Hull LLP, an innovative law firm that practices exclusively in estate, trust and capacity litigation. To watch more Hull & Hull TV episodes, please visit our Hull & Hull TV page.

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