As I get older, so do my parents, my friends parents and my clients’ parents. I find this topic coming up more often as our parents are aging. I dislike this topic just as much as the next person but it must be done.
DEATH and TAXES happen and therefore we need to know what our tax obligations are too.
Let’s say you have been named an executor in someone’s will. Guess what, you are required and obligated to file a FINAL tax return for the deceased AND make sure their taxes are paid.
The FINAL tax return must always be filed. It is mandatory. It includes all income up to date of death and certain deemed dispositions. But there are three OPTIONAL types of returns to consider which are:
- Return for RIGHTS or THINGS
- Return for PARTNER or PROPRIETOR
- Return for INCOME from a TESTAMENTARY TRUST
My focus here is on the first one, RIGHTS or THINGS. The RIGHTS OR THINGS tax return is for amounts that have not been paid to the deceased at the time of their death and would only be included in their income when the amount was paid and received. Some examples include:
- Salary, commissions and vacation pay. These amounts will only go on this return if the employer owed them at the date of death AND they are for a pay period that ended before the date of death. For example, the deceased is paid biweekly for salary and/or commissions and their date of death is May 16. Pay period runs May 1 to 15 with pay day on May 20. The company owes the deceased for the entire pay period. Because these days are owed and unpaid, they can go on the RIGHTS or THINGS return.
- Old age security (OAS) benefits that was due and payable before date of death. i.e. OAS is paid on the 20th of the month and the date of death is the 18th of the month. The payment is still owed and unpaid therefore can go on the RIGHTS or THINGS return.
- Unpaid dividends declared before the date of death. For example, a company the deceased owned shares in announced dividends on June 1 to be paid on August 1 and the date of death was June 15. As the dividends were paid after the date of death, they can go on the RIGHTS or THINGS return.
As you can see, these amounts were all owing to the deceased at the date of death however they were unpaid and therefore not taxable until they are paid out. These amounts will be paid out as soon as possible once deceased and therefore are taxable when paid and will go on the RIGHTS or THINGS return.
Filing tax returns with your Professional Accountant costs money, right? SO WHY WOULD ANYONE WANT TO FILE MORE THAN ONE TAX RETURN in this situation?
TAX CREDITS is why!!! Some credits can be claimed multiple times, some can be shared between the returns and others can only be claimed against certain types of income.
On EACH OPTIONAL return and the FINAL return, you can claim the basic personal tax credit ($13,229), the age amount ($7,637), the spousal credit ($13,229), eligible dependent ($13,229), amount for infirm dependents age 18 or older, and the caregiver amount. Tax credits which can be SHARED between the FINAL and OPTIONAL returns include adoption expenses, disability amounts ($8,576), interest on student loans, tuition, charitable donations, home buyers and medical expense.
AGAIN, why would you want to pay a Professional Accountant to file additional tax returns for the deceased? All of these tax credits can add up to a huge amount of tax savings. If the deceased has a considerable amount of income, these tax credits can be hugely beneficial and the tax savings will likely far outweigh the professional fees.
Lastly, some information on filing deadlines for these two returns.
FINAL RETURN – the due date is the same as normal (April 30 of the following year) or if the date of death is between November 1 and December 31, the due date is 6 months after the date of death. i.e. Date of death is November 15, the FINAL return is then due May 15.
RIGHTS OR THINGS – the due date is the later of 90 days after the notice of assessment (or reassessment) for the FINAL RETURN and one year after the date of death.
The penalties and interest apply as usual for late filing or late payments.
Once you receive all the notice of assessments, make sure you request a CLEARANCE CERTIFICATE. As the executor or legal representative, you will remain liable for all unpaid taxes if the certificate is not requested.
**Tax credits amounts noted above are based on 2020 federal amounts only**
***This blog is for information only and not to be used as tax advice or planning without first seeking professional advice. Information is also subject to change without notice.