The old saying ‘Nothing is certain but death and taxes’ is oh so accurate. When death occurs, tax obligations will certainly follow—but not for the deceased. Have you agreed to be an executor of estate for a loved one? Taking on the responsibility of estate planning can be a big job during an emotional time, so you’ll want to be ready and informed about what to do to close the estate when your loved one passes away. Here are five steps to take to plan ahead so you can facilitate the preparation of your loved one’s final return(s).
1. Be Prepared
Talk to your loved one. What are their wishes? Ask where they keep their assets, accounts, valuables, etc., and get to know their most trusted advisors. Have they or can they provide advice that will alleviate the tax burden for that final tax bill or reduce probate fees? Where is your loved one’s will? Have they pre-arranged their funeral arrangements? If you know where to look and who to talk to once your executor duties begin, your task will be much less stressful.
This next point does not have to do with taxes but may provide another discussion point with your loved one. A funeral officiant recently mentioned that many family members do not know what hymns or songs the deceased liked best and would perhaps like played or sung at their funeral. Asking a loved one to include that with their will might be a good idea.
2. Time for Informing
Your loved one has passed, and you are now the individual to make arrangements and inform others. After breaking the news to close friends and relatives, your next step will most likely be to speak with the funeral director. They will work with you to facilitate any funeral arrangements, but did you know that they quite often do more than that?
Your entrusted funeral director may also offer to help with some of the financial details (for a fee), including informing Canada Revenue Agency (CRA) of the death, canceling the deceased’s health card and driver’s license and assisting with the Canada Pension Plan (CPP) Death Benefit application—some may even cancel credit cards. You will need many original copies of the death certificate as it’s a required document when informing businesses, banks, lawyers, the CRA and financial advisors. As each is updated, they will register the death and guide you towards the necessary next steps.
3. Gathering
Remember in step one you learned who, what and where to look to access your loved one’s financial information? Now is the time to start gathering information from those sources.
You’ll need to collect information required for the final tax return. Essentially, you will be preparing a snapshot of everything the individual owned as of the date of death. Start by making a list. Be sure to include the location and value of anything worth more than $1,000. For hard assets like investments and real property, obtain the original cost and current fair market value (your loved one’s financial advisors will be able to help you with this). Most tax slips will arrive at their usual time, so there’s no hurry to gather this information immediately. However, it’s important to note that if the deceased is a senior, the CRA will send T4(OAS) showing how much Old Age Security was received in the current year. You will need it come tax time.
4. Probate
You now have a list of all hard assets, investments and real property owned by your loved one. Who do you take this to first? Usually, the first person you’ll want to take the list to is the lawyer who worked with the individual to create the will. They’ll advise you based on assets listed, beneficiaries and provincial regulations whether the will needs to go to probate. Probate is a tax on assets, not to be confused with tax on income. Each province and territory (apart from Manitoba) has specific rules and rates.
5. Tax Information
The earliest a tax return is due is six months after the date of death, so there’s no need to rush this step. However, it’s a good idea to get in touch with your loved one’s tax professional as they’ll be a valuable resource. Did you know that there are up to five tax returns that can be filed? The most common of these are the T1 Final, T1 Rights or Things and T3 Trust (Estate) returns.
The final return includes income earned up to the date of death, and the (optional) rights or things return includes income earned by the deceased but paid after death. This reduces the income reported on the final return and has the added bonus of allowing you to claim the personal amount again.
The T3 estate return reports income connected to the deceased but is estate income and not that of the deceased taxpayer. The most common to be reported on the T3 return is the CPP Death Benefit (if not claimed by a beneficiary) and capital gains on investments disposed of by the estate after death. With the list and documents you have gathered, your tax professional will analyze and advise which returns can (or should) be filed to maximize tax efficiencies.
6. Wrap Up
To finalize the estate, request a Clearance Certificate (or two) from the CRA to get the final stamp of approval that all taxes are paid (or received) by the deceased and the estate. Once that’s completed, you can distribute all residual assets to the beneficiaries of the will, and your role as executor of estate is complete.
As you can see, there’s a lot involved in estate planning. There are people like the deceased’s financial and tax advisors, their lawyer and even the funeral director who can help, but you are ultimately the lead. We hope these tips will help you better understand and prepare for your role, and how best to navigate your way through this challenging and emotional time.
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