Breakthrough Wills and Estate Planning Answers

#14 Executors File Your Income Tax Returns and Pay Your Taxes – or Else

Here are four key income tax concepts that are vital for your estate planning.

1. Final return – your executor files your last income tax return. This used to be called your terminal tax return. I’m not kidding, now it is called your final return. Basically, it includes all income received and/or earned to the date of death and taxable capital gains as deemed to be sold before death.

On death, certain types of income receive different tax treatment. They may be reported by filing separate tax returns, which can save money. You need tax professionals to handle these returns.

This is why executors need proper tax advice. They require access to your records for accurate information. Also, they must be aware of the special rules that apply for unusual net capital losses realized in the years prior to death.

2. Tax credits – donations to registered charities or the Crown can generate non-refundable income tax credits. You can use credits to reduce income taxes owed at death. Examples include gifts of cash, insurance, RRSPs, stocks or eligible securities acquired through stock-option plans.

When it comes to income taxes and giving to charity, remember this: donation of capital property, such as securities, is more attractive now because the government has eliminated capital gains for donations of publicly traded securities.

Charitable gifts can reduce your income taxes. You need to consult your own independent tax advisor and charity as part of your planning.

3. Estate tax returns – your estate representatives must report your income received and taxable capital gains realized after death. They do this by filing a return called a trust return. Trust returns report income received after a person dies. Special rules apply for allowable capital losses incurred during the first year of an estate. This is referred to as the Executor’s Year.
4. Personal liability – executors are personally responsible to pay income taxes from your estate. To avoid this personal liability, executors must not distribute assets until after they obtain tax clearance certificates from the federal government.

You Can Run but You Can’t Hide

There’s something very important to remember about income tax. You may have never reported any increase in the value of your vacation property, RRSPs or business on your income tax return. When you pass on, however, this increase or gain will be reported on your final tax return.

The size of your final tax bill can generally only be estimated. Taxes are always calculated on prevailing tax rules.

Review your estate’s estimated income tax liability with a professional tax advisor. Such advisors can find ways to reduce income tax liability for your estate.

You can also consider reducing provincial estate administration tax (EAT) in Ontario.

Do you need help understanding federal income taxes? Want to make your will but not sure what’s involved? I can help you. Contact me for a meeting.

I am a Certified Specialist in Estates and Trusts Law.