Executor: Tips when preparing to file final returns

Have you agreed to be an executor for a loved one?  If so, I just know you want to be ready and informed about what to do when the time comes.  When it is time to ‘be’ the executor, over and above the additional tasks you have to do, you could be also faced with the emotions of your loss.  For that reason, amongst others, the time to check into what is involved is NOW! 

The old saying – nothing is certain but death and taxes is oh so accurate.  When death occurs, tax duties certainly follow.   Read on for five steps of planning ahead so you can facilitate the preparation of your loved one’s final return(s).

Step One – Be Prepared (congrats, you’ve already started by reading this article):  Talk to your loved one – oh so many questions to ask.  What are their wishes?  Where do they keep their assets, accounts, valuables?  Who are their most trusted advisors?  Get to know them. Can they provide advice that will alleviate the tax burden for that final tax bill or reduce probate fees? Where do they keep their will?  Have they pre-arranged their funeral arrangements? If you know where to look and who to talk to once you ‘are’ the executor your task will be much less stressful.  

This next point does not have to do with taxes, but may provide another discussion point with your loved one (because, well, being an executor is definitely not JUST about finance and taxes).  A funeral officiant recently mentioned that many family members do not know what hymns or songs the deceased liked best and would perhaps like played or sung at their funeral.  Might be wise to find out what type of funeral is wanted (if any or any special requests? 

Step Two – Time for Informing:  Sadly, your loved one has just died; you are now the individual to make arrangements and inform others of their death.  After breaking the news to close friends and relatives, you will be talking with the funeral director next.  They, of course, will work with you to facilitate any funeral arrangements.  However, did you know that they quite often will do more than that?   Your funeral director often helps with some of the financial details as well.  They may inform CRA of the death, cancel health card and driver’s license, assist with the CPP Death benefit application and may even cancel credit cards.  The funeral director will provide you with the death certificate, of which you will require many original copies.  This is a required document when informing businesses, banks, lawyers, CRA and financial advisors.  As each institution is informed, they will instruct you as to the required tasks. There has been a recent policy change for many funeral homes.  The death certificate does not always include the SIN.  For transactions with CRA, be certain the SIN is written on this and any other correspondence to them.

Step Three – Gathering:  Remember in step one you learned who, what and where to look to access your loved one’s financial information?   Well, now is the time to start gathering from those sources.  I know you will be thankful that you know where to look and who to talk to.  Have your discussions with the required advisors and gather your documentation. 

Final tax returns are due within 6 months or the usual tax filing deadline, whichever is later.  Did I hear you ask what information is required to be included on the final return(s)?   Essentially you will be preparing a snapshot of everything the individual owned as of the date of death.  Make a list.    Include the location and value of anything worth more than $1,000.  For hard assets, investments and real property, obtain the original cost and current FMV.  The trusted financial advisors will come in handy for this step!  Note which assets need to be reported on the tax return.  Most tax slips will arrive at their usual time so there is no hurry to gather this information immediately.  However, it is important to note that, if the deceased is a senior, CRA will send T4(OAS) prior to the usual time, showing how much Old Age Security was received in the current year. Hold onto it, you will need it!

Step Four – Probate: You now have a list of all hard assets, investments, real property owned by your loved one.  Who do you take this to first?  Usually, this will be the lawyer who worked with the individual to create the will.  They will advise you, based on assets, listed beneficiaries and provincial regulations whether or not the will needs to go to probate.  Probate is a tax on assets, not to be confused with tax on income.  Some assets that are not included on tax returns will be required to be included for probate calculations.  Each province (except Manitoba which, at the moment, is probate-free) has specific rules and rates. 

Step Five – Tax Information: Your loved one’s trusted tax professional could well be your most valuable resource.  As mentioned above, the earliest a tax return is due is 6 months after the date of death so there is no need to rush this step.  Did you know that there are up to five tax returns that can be filed?  Your entrusted tax professional will know!  The most common of these are the T1 Final, T1 Rights or Things and T3 Trust (Estate) returns.

The final return includes income earned up to the date of death and the (optional) rights or things return includes income earned by the deceased but paid after death. This reduces the income reported on the final return and has the added bonus that the personal amount can be claimed again on this return.  

The T3 estate return reports income connected to the deceased but is estate income and not that of the deceased taxpayer. The most commonly reported income on the T3 return is the CPP death benefit (if not claimed by a beneficiary) or capital gains on investments disposed of by the estate after death.  With the list and documents you have gathered, your tax pro will analyse and advise which returns can (or need to) be filed to obtain the most tax efficient solution possible.  

Wrap up – Final Step: To finalize the estate, request a Clearance Certificate (for each return filed) from CRA to get the final stamp of approval.  The Clearance Certificate verifies that all taxes are paid (or received) by the deceased and the estate. Once this is received, THEN, you can distribute all residual assets to the beneficiaries of the will and your role as executor is complete. 

Congratulations, you lived up to the trust given to you when your loved one chose you to represent their estate.  Feels good, doesn’t it? 

Diane Elliott, DFA - Tax Services Specialist, RWM-Real Wealth Manager is founder of Millennium Tax Services in Cambridge, ON and an instructor and course writer with Knowledge Bureau.