A T1 Terminal Tax Return is to be filed upon a tax payer’s death. According to Canadian tax law, a taxpayer is deemed to have disposed of all of their property at the fair market value, immediately before death, even though a sale of assets did not take place. This could include non registered assets, RRSPs/RRIFs, real estate, cars, investments, shares in a private company, etc. This triggers capital gains and burdens the estate with a potential tax liability that they’d have to be responsible for.
A T1 terminal tax return must be filed by the executor in order to account for this deemed disposition and the tax payable that’s triggered. However, you may defer the tax through:
- Rollover Provisions – Registering your assets in joint a, naming a qualifying beneficiary on your registered investments, transferring assets into a spousal trust
- Exemptions – Taking advantage of tax planning tools such as Lifetime Capital Gains Exemption
- Tax Elections – Contributing into a spousal RRSP, splitting income, filing additional tax returns, using capital losses, etc.
T1 Terminal Tax Return
The T1 Terminal Tax Return return also known as the final return would include the taxpayer’s income from January 1st up to the date of death. This would include investment and employment income in addition to any accrued amounts. Dividends, interests as well as the fair market value of all RRSPs/RRIFs must be reported in the final income.
RRSPs/RRIFs
At the time of death, a taxpayer is deemed to have received the fair market value of their RRSP/RRIF as income which is to be taxed at their marginal tax rate. This amount would be reported on the T1 Terminal Tax Return. However, there are exceptions to this as tax can be deferred by naming a qualifying beneficiary such as your spouse or dependent child. In Quebec, a beneficiary must be named through your will.
- Naming Your Spouse as a Beneficiary – Upon death, your RRSP/RRIF investments will be liquidated and the spouse may transfer the funds directly into their own RRSP or RRIF on a tax deferred rollover. However, depending on your tax situation, such as low income during the year of death, it could be beneficial to have the proceeds be taxed on your final tax return or in your spouse’s hands in order to minimize your tax payable.
- Naming Your Spouse as a Successor Annuitant – Successor annuitant applies to your RRIF and upon death, the RRIF will continue to exist in your wife’s name. As a successor annuitant, your spouse can control the timing of withdrawals and taxation.
- Naming a Dependent Child as a Beneficiary – Upon death, the value of your RRSP/RRIF can be taxed in your hands or the beneficiary’s hands on the final tax return which is advantageous as they would be more to likely have minimal income.
RRSP Deduction
In the final year of death, if the deceased taxpayer has contribution room, the executor can make a contribution into a spousal RRSP. This will result in a tax deduction on the final return of the deceased.
In addition to the final return, there are 3 optional tax returns that can be filed on behalf of the deceased individual which can reduce the tax payable. By filing optional tax returns, the deceased can claim personal tax returns credits more than once. This could result in tax savings for the estate. These optional tax returns are:
- Testamentary Trust – If the deceased received income from a testamentary trust, the income can be reported on a separate tax return.
- A business where the deceased was a partner in – income from a business that the deceased taxpayer was a partner in can be reported in a separate tax return.
- “Rights and Things” – includes income that the deceased taxpayer was entitled to but was not paid at the time of death. This could include things such as OAS payments, bond interest, accounts receivables, dividends, vacation pay, CPP, bonuses, etc.
Due Date of T1 Terminal Tax Return
Individual T1 Terminal Tax Return Due Date
- If the death of the taxpayer occurred between January 1st and October 31st, final return is due on April 30th of next year.
- If the death occurs later in the year between November 1st to December 31st, the final tax return is due within 6 months.
Business Owner T1 Terminal Tax Return Due Date
If the deceased was running a business at time of death, the deadline to file a tax return is as follows:
- If the death of the taxpayer occurred between January 1st and December 15th, final return is due by June 15th of next year.
- If the death occurs later in the year between December 16th to December 31st, the final tax return is due within 6 months.
Spousal Trust T1 Terminal Tx Return Due Date
If upon death a spousal trust is set up through a deceased’s will, then final due date of the tax return is 18 months after the date of death. Any taxes payable is due by due date mentioned above.
It's important to file the final return on time as CRA charges a penalty of 5% on any taxes owing plus 1% of the balance outstanding for each full month, up to a maximum of 12 months.
