If you’re responsible for administering the estate of a deceased individual, you’ll need to file a terminal tax return in their name. In this article, we discuss what a terminal return is as well as why, when and how an executor needs to file it in order to avoid penalties, or even worse, personal liability.
What is a terminal return?
A terminal return, also known as a final return, is the final tax return filed for an individual who has passed away. This return covers the period from January 1 of the year of death until the date of death.
There are also three types of optional returns that can be filed, the most common of which is the return for rights or things.
Rights or things are amounts such as employment income that would have been owed to the deceased had they not passed away. You may choose to file this return if there was a relatively large unpaid amount owed to the deceased at their date of death.
The other two types of optional returns are the return for a partner or proprietor and return for income from a graduated rate estate. For more information on those returns, see the CRA website.
Why is filing a terminal return important?
Filing a terminal return is important because it ensures that any taxes owed by the deceased individual are paid in full. The terminal return also allows for any unused tax credits or deductions to be applied to the final tax bill.
If you are the executor or administrator of an estate, filing a terminal return is an essential first step in the process. Filing a terminal return is necessary to obtain clearance from the Canada Revenue Agency (CRA), which legally confirms that all outstanding taxes have been paid. While clearance isn’t always required to distribute the deceased’s assets to their beneficiaries, it is a good idea for an executor to obtain clearance to avoid being held personally liable for any outstanding tax debt.
What are the tax liabilities for a deceased individual?
When representing a deceased individual, you should be aware of a few circumstances that could result in significant tax liabilities. These include deemed dispositions and the taxation of RRSPs and RRIFs.
When an individual dies, their assets are deemed to be disposed of at their fair market value on the date of their death. This is known as deemed disposition. As a result, the estate of the deceased person may be subject to tax on any capital gains that arise from this deemed disposition. In general, if the fair market value of the assets is higher than their cost base, then the estate may be subject to capital gains tax on the difference. However, if the assets are passed on to a surviving spouse or common-law partner, there may be provisions that allow for a tax-free rollover of the assets.
RRSPs (Registered Retirement Savings Plans) and RRIFs (Registered Retirement Income Funds) are both tax-advantaged retirement savings plans in Canada. When the owner of an RRSP or RRIF dies, there are tax liabilities associated with these plans that must be considered.
At the time of the owner’s death, the entire balance of the RRSP or RRIF is generally included in their income for tax purposes, which may result in a significant tax liability. However, if the RRSP or RRIF is left to a spouse/common-law partner or to a dependent child or grandchild who is financially dependent due to a disability, it may be possible to transfer the funds on a tax-deferred basis.
Who files a terminal return?
The executor is responsible for ensuring the taxes of the deceased person are filed and that any balance owing is paid before distributing the estate. This includes filing any outstanding returns from previous years and filing the terminal return.
For a full list of executor responsibilities, see our Executor’s Checklist for Terminal Returns.
It is also recommended that they apply for a clearance certificate, confirming all outstanding taxes have been paid to the CRA, before distributing the assets of the estate.
The executor or administrator of the deceased’s estate is responsible for filing the terminal return. The executor is the person named in the deceased’s will to administer their estate, while an administrator is the person appointed by the court to administer the estate if there is no will, no executor named in the will, or if the executor named is unwilling or unable to act.
If you are the executor or administrator of an estate and need assistance with filing a terminal return, we recommend seeking help from an accountant. Our team at RHN has extensive experience filing terminal returns and other executor/administrator responsibilities and can provide you with the guidance you need during this difficult time.
When does a terminal return need to be filed?
If the deceased or their spouse/common-law partner was not carrying on a business in the year of death, the due dates for filing their tax returns depend on the date of death. If the individual passed away between January 1 and October 31, the final tax return is due on April 30 of the following year. However, if the individual passed away between November 1 and December 31, the final tax return is due six months after the date of death.
If the deceased or their spouse/common-law partner was carrying on a business in the year of death, the due dates for filing their tax returns are different. If the individual passed away between January 1 and December 15, the final tax return is due on June 15 of the following year. However, if the individual passed away between December 16 and December 31, the final tax return is due six months after the date of death.
For more information on terminal return deadlines, see the Canada Revenue Agency website.
Need help with estate planning or administration?
If you need assistance with filing a terminal return or have any other accounting-related questions, please do not hesitate to contact RHN Chartered Professional Accountants. Our team of experienced CPAs is here to help you navigate the complex world of taxes and accounting. Contact us today to schedule a consultation.
This post has been prepared for general information purposes. It is not advice. The information presented may not fit your unique situation, please consult one of our trusted business advisors at RHN CPA for further clarification and interpretation of your circumstances.