Mar 26, 2018
If you’ve recently become the Executor of an estate or are simply estate planning for your own future you may be wondering how to pay an estates taxes.
When someone dies there are two main taxes that must be paid. First, the executor of the estate must file a final income tax return for the deceased’s final year. Tax may also need to be paid on interest or capital gains from the estate.
People appoint a legal representative, often called an executor, in their will. This legal representative is in charge of filing the final tax return and settling the estate before distributing the estate to any beneficiaries. The legal representative should also let the beneficiaries know which parts of the estate that they received are taxable.
Simply, you will need a total of the deceased’s income pulled from all sources. This may require you to engage with employers, pension managers, investors and the deceased’s banks. A good starting place is to review previous income statements. You will need to have documentation to provide their total income from January 1st of the year of their death until the date of death.
A Registered Retirement Savings Plan or a Registered Retirement Income Fund is considered income of the deceased, and taxable for the return.
If the legal representative needs information from the CRA, they must provide a death certificate, the deceased’s social insurance number and a document proving that they are the legal representative.
If the date of death is between January 1st and October 31st, you must have the tax return filed by April 30th of the following year. However, if it occurs between November 1st and December 31st, you have six months from the date of death to file the return.
In Canada, there is no inheritance tax. Instead, the CRA treats the estate as a sale. All capital property, that is not being inherited by a spouse or common-law partner, is said to be sold just prior to the date of death.
All capital property is deemed to be sold at fair market value. Fair market value is the amount that a property would be sold for at any given time. If the Fair Market value is higher than what the deceased originally paid for the property, it will be taxed as a capital gain and the increase will be documented in the final tax return. You have capital gain when you sell capital property for more than you paid for it. Capital gains aren’t taxed at a regular rate. You only have to pay taxes on half of the capital gain.
Once the income tax is paid by the estate, the CRA will issue a clearance certificate. It is important that the executor receives this before distributing the estate, as they will become liable for any taxes owed by the deceased.
Being the legal representative of someone’s estate can be a complex task, and preparing your own estate isn’t easy either. At Chown Cairns, our estates lawyers can advise clients on how to build their estates and attend the administration of the estate.