What estate expenses are tax deductible?

When a taxpayer passes away, there are specific tax credits and deductions that must be reported in their last income tax return. This includes credits for taxes paid before death, refundable tax credits, losses from prior years, and capital gains deductions.

The last tax return can include three types of amounts:

1. Credits and deductions that can be claimed fully in each return

2. Amounts linked to specific income reported in the return

3. Credits and deductions that can be divided between multiple returns, but must not exceed the total amount that would have been claimed in a single return

In the year of a taxpayer's passing, their spouse may have the opportunity to utilize tax credit transfer measures. These measures allow for the transfer of unused credits and deductions between spouses, but can only be utilized in relation to the deceased's last tax return.

RRSP Contributions for Deceased Taxpayers

RRSP contributions made by a taxpayer prior to their passing are eligible for deduction, as long as all conditions are met. In cases where there is unused contribution room, the person handling the deceased's affairs can choose to make a contribution to a spousal plan in their name.

These extra contributions can then be deducted from the deceased's final tax return. The representative must make these contributions within 60 days of the end of the year of the taxpayer's passing.

Management, conservation, and maintenance expenses

It’s an executor’s responsibility to ensure that the assets belonging to the estate are well-cared for and maintained during the probate process.

This particularly applies to any real estate that the deceased may have owned. In order to maintain and manage property during probate, an executor will have to pay expenses such as property taxes, homeowners insurance, cleaning, maintenance, and repair costs.

In case the property needs to be sold, the executor must also take care of the closing costs of the sale. This also goes for vehicles that the deceased may have owned, such as cars, motorcycles, and boats.

Depending on whether the executor or the estate covered these costs, they can be deducted from the corresponding tax return.

Medical Expense Coverage

Medical expenses incurred by a taxpayer can be covered over a two-year period. This 24-month window allows for expenses incurred in the lead up to and including the date of death to be included and potentially claimed as deductions.

Capital Losses for Deceased Taxpayers

Capital losses incurred in the year of a taxpayer's passing and any unused capital loss carryovers can be applied against income from any source for the year of death and the preceding year.

These losses are determined after deducting any previous capital gain exemptions used and those used in the year of death. It's important to note that there are special regulations to consider if the deceased had already claimed their capital gains deduction.

Claiming Donations on Final Tax Return for Deceased

When filing the final tax return for a deceased taxpayer, you can claim all charitable gifts made during the year of their passing, including those donated through a will, transferred directly from RRSPs, RRIFs, TFSAs, or life insurance policies, as well as any carried forward from previous years.

The maximum amount that can be claimed is 100% of the taxpayer's net income, which includes the proceeds from RRSPs and RRIFs, as well as the results of selling any capital assets. In case of excess donations, they can be claimed on the taxpayer's previous year's tax return, again limited to 100% of their net income.

It's important to note that donations from a T1 return cannot be carried forward to a T3 return.

Every estate is unique, and so is its tax situation. If you’re an estate executor and feeling uncertain about what expenses you can deduct and on which tax return you should claim it, you don’t need to do it alone.

Need help with the final tax return?

Our experienced team of professionals can help guide you through these obstacles and give you the tools you need to navigate the estate settlement process. Reach out for a free consultation and find out how we can help.