Executors Need to Remember These Estate Tax Tips

Are you an estate trustee, wondering if you need professional tax help? You may say, “Why bother? After all, I prepare my own personal tax returns.”

The risks are too great to do it yourself. I recommend clients avoid these risks.

Forget about doing estate tax returns yourself. Get professional advice from a qualified, licensed tax advisor. This is an investment paid for by the estate with plenty of benefits. And it will help you stay out of trouble.

If you are late filing estate tax returns, you may have to pay penalties for the estate. This can be 5% of the balance owing plus interest.

What happens if you don’t pay taxes on time? You may be personally liable. This can affect your executor compensation and your relationship with estate beneficiaries.

Also, as the estate’s legal representative, you should not distribute estate property until you receive a tax clearance certificate. The reason for this is clear. You can be liable for any unpaid taxes. A tax clearance protects you and ensures all taxes are paid.

Any mistakes made in estate tax returns may be caught in the audit process. You can fix tax problems before a clearance is issued.

What if you made the mistakes?

You will need to correct them. This can result in refiling or amending returns and creates further delays. Delays can aggravate beneficiaries waiting for their inheritance.

Tax Tips Estate Trustees Must Know

As the estate’s legal representative you must report income from all sources. The final return includes income from January 1st to and including the date of death.

Income after the date of death is reported in a separate estate return.

You need to look for prior tax returns and notices of assessment.

You need to:

  1. file all required tax returns for the deceased
  2. make sure all taxes are paid before distributing the estate
  3. tell beneficiaries what amount of what they receive is taxable

You must file tax returns for any outstanding year’s returns. Remember an RRSP/RRIF is treated as income received before a person dies. This must be reported in the deceased person’s final return.

Surviving spouses or common-law partners can elect to transfer the amount to their own RRSP. The surviving spouse or partner reports the payment and claims a deduction equal to the transferred amount. Consult a qualified, licensed tax advisor for specific estate tax advice.

Get Income Tax Clearance Certificates

The clearance certificate confirms that all taxes have been paid. Your tax liability does not mean that you personally must pay the deceased’s taxes. You are liable to the extent of any estate property you distribute.

Asking for a clearance certificate involves completing government forms. Normally you would forward copies of the will, codicils or probate documents, a list of assets and distribution plan. All outstanding tax returns must be filed and taxes paid. You can find more information about estate income taxes at the Canada Revenue Agency Website. Start with: Preparing Returns for Deceased Persons 2013

About Ed Olkovich

I am Toronto estate lawyer and author. I edit Carswell’s legal publication, Compensation and Duties of Estate Trustees, Guardians and Attorneys. I am a Certified Specialist in Estates and Trusts law. I have handled estate disputes and probate problems since 1978. © 2014