Filing the terminal tax return for a deceased individual is a pivotal part of the estate settlement and probate process in Canada. It's a task that intertwines the complexities of tax law with the emotional realities of loss, making it a uniquely challenging responsibility.

As difficult as this may be, the Canada Revenue Agency expects the deceased person's legal representative to file the final tax return by the end of the current or next financial year. This unique filing process is known as a terminal tax return.

When an individual dies, their recent tax responsibilities remain valid until the time of death. Since they cannot file their tax return, the person designated as the personal representative takes the role of filing it. This final tax return filed on behalf of a deceased person is called a terminal tax return.

Generally, the terminal tax return in Canada is due the following year after the person's death. However, the personal representative will only file till the month the person dies. For example, if the person dies in August, the terminal tax return will show their tax information until August instead of December (the standard timeline for everyone).

The Canada Revenue Agency requires the personal representative to gather and submit all the documents containing the deceased person's income and expense information. If not, the entire process will be considered incomplete, and the executor or personal representative may be penalized.

The Canadian government puts the responsibility of filing the terminal tax return with the executor. Outlined in the will, but appointed legally through the court - the executor is ultimately responsible for filing the terminal tax return.

If the decedent passed away without a will, or a will without having named an executor - the court will assign someone, or someone along the prioritized line of heirs or other interested persons can apply for executor.

The administrator or executor must act in the best interest of the beneficiaries and the deceased person's estate. They achieve this by adhering to the final tax return regulations. If they do not fulfill their responsibilities, the court may hold the executor liable for any losses the beneficiaries or estate suffer.

The Canada Revenue Agency requires you to fill out the terminal tax return either six months after the time of death or on April 30 of the year following the date of death. For example, if the person died on February 2, 2023, you must file the terminal tax return by July 30, 2023, or April 30, 2024.

This generous provision gives you reasonable time to gather all the necessary tax information and documents. If you cannot make the deadline due to unavoidable circumstances, make an effort to estimate the income and taxes to be paid and clear a portion of the amount due to show your desire to do things legally.

You can also request an extension from the Canada Revenue Agency (CRA) to avoid interest and penalties charged for late filing. When you get stuck and the deadline is approaching, consult an attorney or tax professional to help you navigate the CRA requirements within the remaining time.

We recognize that the process of filing taxes can be challenging, but navigating tax returns for a deceased loved one can be an even more daunting task.

To help you, we've created a simplified step-by-step process of filing a terminal tax return.

1. Apply for authorized representative

One of the first steps an executor must take when dealing with the estate taxes - is to notify the CRA.

To do so, the executor has to apply to the Canada Revenue Agency (CRA) to become an Authorized Representative. This status grants them access to the deceased individual's CRA account.

With this access, the executor can view and handle all outstanding tax returns, which is a crucial part of settling the estate. This role also allows them to review notices of assessment, ensuring any due taxes or refunds are appropriately addressed.

Moreover, the Authorized Representative will be able to access important filed tax slips such as T4s, T4A, T3, and others, which are crucial for accurate and efficient tax filing. These documents are uploaded within the deceased's CRA account, providing all necessary information at their fingertips. This streamlines the process and alleviates some of the administrative burdens during this challenging time.

2. Gather the Necessary Documents

Gathering the necessary documents needed by CRA assists them in getting an overall picture of your deceased loved one's financial situation. Canada requires the legal representative to submit documents containing all income and expense sources.

They include:

• Previous tax returns: This document helps the CRA to analyze the deceased person's financial history, unused tax credits, and carried forward deductions.
• Statements of Accounts: Having the deceased person's investment accounts, bank accounts, and other financial holding accounts helps CRA measure their assets and earned income.
• Notices of Assessments: These documents given by CRA prove the deceased person had been reporting accurate tax information.
• RRIF and RRSP statements: Statements of the Registered Retirement Income Funds and Registered Retirement Savings Plans help to assess if the deceased person made any withdrawals.

The following table summarizes other documents you need to have:

3. Fill Out the Tax Return

When filling out the tax return, it is mandatory to use the regular T1 income tax return form provided by CRA. The T1 form is also called the Income Tax and Benefit Return. All Canadians use it to file their personal income tax.

In this unique situation, you must indicate on the form that the return is for a deceased person.

The information you must provide in the T1 form includes the following:

• Name
• Physical address
• Social insurance number
• Income
• Expenses
• Deductions and credits
• Date of death

If you make a mistake after submitting the T1 form, notify CRA immediately, and they will give you the process of adjusting or amending the affected section.

4. Claim Deductions and Credits

In most instances, legal representatives fail to capture all the deductions and credits the deceased person accrued. This missed opportunity causes the tax liability to be more than it should have been, meaning fewer gains for the beneficiaries. The deductions and credits to look out for include the following:

• Age amount: This non-refundable tax credit reduces the federal tax payable based on the deceased person's net income.
• Medical expenses: You have the right to claim eligible medical expenses your deceased loved one incurred within 12 months before their death.
• Spouse or common-law partner amount: You can claim a tax credit if the deceased person supports a common-law partner or spouse.
• Charitable donations: You have the right to claim deductions if the deceased person made charitable donations within the year of their death.
• Capital losses: Once you claim capital losses, you can use them to offset the capital gains.
• Unused tax credits: You can utilize the unused tax credits the deceased person had—if they did not claim it in the previous year.
• Principal residence: principal residence is not taxable at the time of death if it qualified as the individual's principal residence for all years owned. However, any gain in value from the date of death to the date of sale by the estate is taxable.

Ensure you have the supporting documents, such as statements and receipts, to prove the deceased person qualified for the specific deductions and credits.

5. Submit the Return

Once you have completed steps one to three, it is time to finalize the process and confirm you have acquired all the documents and filled the tax return correctly. Here is a summary of the submission process:

1. Complete the terminal tax return by filing it using fact-based information.
2. Review and verify the personal information and documents to be submitted are accurate. You can also double-check calculations to ensure you have the correct figures.
3. Submit by sending via mail or electronically. If you plan to use mail, print, sign, and send it to the correct tax center in your town. If filing electronically, do it via the CRA NETFILE platform.
4. Make personal copies of everything you have submitted in case of future audits or inquiries.

CRA may request additional documentation after you submit the terminal tax return and documents. If they reach out, respond immediately to enable you to finalize the process quickly. Once they review the terminal tax returns, they will refund any money gained or request you to make payment arrangements to settle the pending tax liability.

Potential Challenges and Solutions

Filing a terminal tax return comes with various challenges you must address to allow you to perform this vital task well. Let's look at some of these challenges and how to solve them in the table below.

Ready to File?

Filing the terminal tax return of your deceased loved one is an essential task that requires attention to detail and adherence to Canada's tax regulations.

In this comprehensive guide, we have discussed the main factors to consider, including filing within six months to one year of the date of death. We also looked at how to file and what you need to succeed despite the challenges you may face.

However, if you are overwhelmed by the filing process, or the estate administration in general - you can book a free consultation with our estate tax professionals, where we can guide you through the process of settling your loved ones estate. Let us help you in this challenging time.