The death of a parent or friend can be an extremely difficult time and finding out you've been named Executor can lead to many questions - the first being what are the responsibilities of an Executor?
Crowe MacKay's trusted tax advisor, Robert Flux, shares details on common tax filings Executors should review on behalf of the deceased as well as details on how they can reduce their financial liabilities.
Responsibilities of an Executor when filing tax returns
Fulfilling the role of an Executor includes a variety of responsibilities but ensuring the following is a top priority:
- filing all tax returns
- making sure all taxes owing are paid
- notifying all the beneficiaries under the Will.
If not executed properly, the Canada Revenue Agency (CRA) can hold you personally liable for the taxes the deceased owes. As the Executor, you must also look after the beneficiaries' interests under the Will. If not managed, they too can bring legal action against you if they feel they are not being properly represented.
Seeking the help of a professional accountant can minimize your exposure to risk when named Executor, helping you with the required tax filings and related planning.
Common tax filings Executors should review
T1: Final individual tax return
The T1 final individual tax return reports all income and gains received up to the date of death. When a person passes they are deemed for tax purposes to have disposed of all assets owned by them. As this typically creates a significant tax liability, Executors that fail to file a final return on time can face large assessments of penalties and interest charges.
T3: Trust tax return
Income and gains earned between the date of death and the time assets are distributed to the beneficiaries or sold are typically reported on the T3 trust tax return. This return must be filed annually until the entire Estate is distributed in accordance with the Will.
Other tax considerations
There are many tax rules specific to deceased persons and their Estates and Trusts. Outside the scope of this article, other things to consider, but not limited to, include:
- filing optional tax returns
- electing out of the spousal rollover provisions
- rules for spousal trusts
- rules for utilizing losses
- rules for donations
- rules for medical/disability
- allocating income to the beneficiaries of the Estate
Protect yourself with a Clearance Certificate
As the Executor, once all tax filings are complete, and before distributing the final Estate assets to the beneficiaries, it is recommended to ask for a clearance certificate from the CRA. A clearance certificate certifies that all amounts for which the deceased was liable to the CRA have been paid. The clearance certificate is crucial to protecting the Executor.
When to start Estate Planning
It's never too early to begin your Estate tax planning, with it being done years or even decades prior to passing. While getting started can seem overwhelming, it's important to understand what will happen to your Estate when faced with unforeseen circumstances. Your financial team, which should include your accountant, financial advisor, and lawyer, can then work together to ensure your retirement and estate goals will be achieved.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.