The Tax Blog for Smart Canadians

Tax return

In the year of death, the representative(s) of the deceased must file a final return to declare the income the deceased gained from the 1^st of January until the date of death. Tax rates and credit rates are the same as a living individual.

The deadline for filing the final return is:

The legal representative should also file to the CRA:

• a copy of the death certificate,
• a complete copy of the will or other legal document such as a grant of probate or letters of administration showing that you are the legal representative,
• the mailing address of the estate, and
• if not already sent, a completed Request for the Canada Revenue Agency to Update Records form.

If the deceased person earned income but did not receive it before they died, then a rights or things return would be necessary, on top of the final return.

Assets

At the time of death, assets such as real estate or shares in stocks are deemed to be disposed at the fair market value at the date of death. This will be the case when the beneficiaries are anybody but the spouse. In this case, on the final return(see above) of the deceased, there might be a capital gain to declare on the deemed disposition of the properties and tax payable.

When the beneficiary is the surviving spouse, there is also a deemed disposition, but at the original cost of the assets. In this case, there would be no capital gain to declare since there is no gain on the deemed disposition.

Pension accounts

Any amounts left in pension accounts such as RRSP, RRIF, RPP, etc. will be deemed withdrawn as of the date of death. If the beneficiary is anybody other than the surviving spouse or a financially dependant child or grandchild (a child less than 18 making less than $15,000 in 2023), the income will be included in the deceased’s final return.

If the beneficiary is the surviving spouse, the income transfers to them instead. This transfer would be taxed in the surviving spouse’s tax return unless they transfer a portion or all of the pension into their own pension accounts. In that case, the amount transferred would not be taxable.

If the beneficiary is a financially dependant child or grandchild, they can defer taxation on the transfer by purchasing an annuity with a term not exceeding 18 years minus the child’s age at the time the annuity is acquired.

TFSA

At the date of death, the TFSA account ceases and becomes a taxable account. The funds at the time of death within the account are paid out tax-free, regardless of who is the beneficiary. Any amount accumulated beyond that date is taxable.

If the TFSA is transferred to the spouse/common-law partner, the spouse can continue the account, or roll the account into their accounts with no tax consequences (not taxable, does not affect the contribution limit).

Capital losses

Capital losses, whether they are unused (carried forward from the previous years) or from the current year can be applied against any income in the final return or the previous year.

Benefits

Many benefits are affected when someone passes away, especially if the deceased was married or had a common-law spouse. Amounts such as the Canada Child Benefit, GST credit, and Guaranteed Income Supplement (GIS) will be recalculated on an individual basis for the payments following the month of death.

Some benefits will trigger when one spouse passes away, such as the allowance for the survivor. If you are between 60 and 64 and gained less than $29,000 income when your spouse passes away, you could be eligible for this tax-free benefit.

Another benefit that is received at the time of death is the CPP death benefit. It’s a one-time payment of $2,500 paid the to the estate at the time of death once the beneficiaries apply. Quebec has an identical payment from the QPP. To be eligible, the deceased must have made contributions to the Canada Pension Plan (CPP) for at least:

• one third of the calendar years in their contributory period for the base CPP, but no less than 3 calendar years, or
• 10 calendar years.