Important financial requirements you must fulfill as the executor of an estate

Being named the executor of an estate comes with many important duties that can quickly become overwhelming, especially if you are dealing with the loss of a loved one. From legal responsibilities to mandatory tax filings, administering an estate is a complex process.

Knowing what you’re responsible for can help you remain compliant with the Canada Revenue Agency (CRA) and avoid penalties. In understanding the financial requirements that you must fulfill as an executor, you can also better leverage tax efficiencies that may be applicable to your situation, all while streamlining the finalization of the estate.

An executor’s core Canadian tax responsibilities are to:

• Identify and report the deceased’s pre- and post-death income
• Ensure tax debts are cleared
• Obtain a CRA clearance certificate before distribution of any estate assets

Continue reading to find out the steps you can take to help ensure compliance and efficiency, and how an accountant can support you during this difficult time.

What are the liabilities of the executor of an estate?

In Canada, executors are legally bound to the estate they are administering. This makes them personally liable for a number of things on the financial side, including:

• Incorrect tax filings
• Missed deadlines
• Improper estate distributions
• Failure to obtain CRA clearance

Any of the above could threaten the estate’s compliance with CRA regulations, which may result in substantial penalties and legal ramifications for the executor.

Below, we outline four important things executors should be aware of to help you avoid being held responsible for the liabilities mentioned above.

4 essential things estate executors need to know

1) Which tax returns and forms to file for the estate

You may be surprised to learn that filing taxes for an estate involves more than just the Terminal T1 personal return. While some of the filings an estate can complete are optional, these additional returns often provide tax efficiencies that are worth considering.

Common tax filings for an estate include:

• Terminal T1 Income Tax and Benefit Return: Also referred to as the Final T1, this return reports any income of the deceased up to the date of death.
• T3 Trust Income Tax and Information Return: This filing is sometimes simply called the T3 or the Estate Return. It reports any income the estate earns after death.
• T1135: This form, also known as the Foreign Income Verification Statement, reports foreign assets owned.
• Compliance Certificate: If any beneficiaries of the estate are non-residents, you may need to obtain this certificate. The certificate serves several purposes including confirming tax compliance, limiting executor liability, facilitating distribution, and preventing penalties.
• Return for Rights or Things: This return reports income the deceased earned but did not receive before death. It is optional but may provide tax savings in some instances.
• Return for Partnership/Proprietorship: Another optional return that may be tax efficient in certain cases, this filing reports how a partnership or proprietorship allocated its revenue and liabilities.

Every estate is unique, and the right approach will vary for each scenario. Reach out to your accountant to better understand which returns and certificates you need to file.

2) How to report deemed disposition

Upon death, the deceased is considered to have sold all the property that they owned. This is known as deemed disposition and it can result in capital gains or losses that the executor must report to the CRA.

Common deemed dispositions include:

• Capital property including investments, real estate, and personal belongings
• Principal residence
• Registered plans such as RRSPs, RRIFs, and TFSAs, with exceptions
• Business property and inventory
• Special rules for certain properties such as qualified small business corporate shares, qualified farms, or fishing properties

If you’re uncertain about what you need to report to the CRA, reach out to your accountant for guidance and support.

3) Ways to minimize the amount of taxes owed

To help minimize the amount of taxes owed by the estate, work with your accountant to put together a plan for the trust taxes. While no estate will be exactly the same, below are a few items to consider when creating your plan:

• Multiple tax returns (i.e. Terminal Return, Return for Rights or Things, Partnership Stub Return, Graduation of Rate Estate (GRE))
• Loss carryback strategy (Subsection 164(6) planning)
• Spousal rollover elections
• Private corporation shares planning (consider lifetime capital gain exemption and pipeline strategy)
• Charitable donations
• Medical expenses
• Use of life insurance

4) The importance of obtaining a clearance certificate

Obtaining a clearance certificate is a crucial step in estate administration for the reasons below:

• It allows an executor to distribute assets without risk of personal liability for unpaid tax debts
• It provides assurance that the estate’s tax obligations have been settled
• Third parties, such as banks, lawyers, and financial institutions, often request a copy of the certificate before they will release or transfer estate assets
• If an executor distributes estate assets without a clearance certificate, the CRA can pursue the executor personally for outstanding tax liabilities up to the value of the assets distributed

If you need assistance with this process, be sure to connect with your accountant.

Find out how Loren Nancke can support you with estate administration

Loren Nancke helps executors manage the tax filings, statement of accounts, and financial obligations of an estate. Our estate administration services guide you in filing the necessary returns and identifying opportunities for tax savings.

Get in touch with our CPA firm to learn more about how we can support you as an executor.

By Wendy Kao

Wendy Kao, CPA, TEP, is an Associate with Loren Nancke responsible for managing several accounting functions for a wide variety of clients and industries. She's known for being resourceful, her clear communication style, and putting people first.

Learn more about Wendy and the rest of our team.