Tax Considerations Following the Loss of a Spouse or Common-Law Partner

By Audra Haber, CPA, CA, David Mueller, CPA, CA, and Kim Nat, CPA, CA; published in CPABC in Focus
Published: March/April 2016

Losing a spouse or common-law partner is not only extremely distressing, it’s also overwhelming. For one thing, there are a number of legal and tax issues that need to be addressed during the grieving process. This article addresses some of the steps an individual should take after the death of their spouse or common-law partner, and the tax consequences associated with the transfer or distribution of property after a spouse or common-law partner’s death. Please note that all future references to “spouse” in this article include common-law partner.

Five important steps

Contact the Canada Revenue Agency and Service Canada

It is very important that an individual notify the Canada Revenue Agency (CRA) shortly after the death of their spouse by completing the form enclosed in RC4111 Canada Revenue Agency – What to Do Following a Death or by calling the CRA directly, as a number of tax implications may arise after a death occurs. For example, arrangements may need to be made to transfer credits or payments to the surviving spouse.

Service Canada should also be informed of the death so that benefits such as Old Age Security, the Canada Pension Plan, and Employment Insurance can be cancelled.[1]

Determine the legal representative

The legal representative of a deceased spouse has important tax-related responsibilities. Note that the surviving spouse will be considered the legal representative in cases where they are:

  • Named as the executor in the deceased’s will;
  • Appointed as the administrator of the estate by a court; or
  • Appointed as a liquidator for an estate in Quebec via the deceased’s will or by a court.

File all required tax returns for the deceased individual

T1 Income Tax and Benefit Return

The legal representative is required to file the deceased’s final T1 Income Tax and Benefit Return. This tax return includes all income earned in the year of death, from January 1 up to and including the date of death.

The CRA will impose penalties and interest if this return is submitted late and a tax balance is owing. If the death of a spouse occurs between January 1 and October 31 (or between January 1 and December 15 for individuals carrying on a business), the due date for the final T1 return is April 30 of the following year (or June 15 for individuals carrying on a business). If the death occurs between November 1 and December 31 (or between December 16 and December 31 for individuals carrying on a business), the due date for the final T1 return is six months after the date of death.

Keep in mind that the due date for the surviving spouse’s personal T1 return is the same as the due date for the deceased’s final T1 return. However, any balance owing on the surviving spouse’s T1 return must be paid on or before April 30 of the year following the year of their spouse’s death, whereas the deadline for the balance owing on the deceased’s return may vary depending on their date of death.

If a spouse dies early in the calendar year before the due date of their previous year’s income tax return, the deadline for that previous year’s return is extended until six months after the date of death, as is the due date for the tax payment. Additionally, the following information must be sent to the CRA:

  • A copy of the death certificate;
  • The deceased’s social insurance number; and
  • A complete copy of the will or other legal document, such as a grant of probate or letters of administration, showing that the surviving spouse (or another individual) is the legal representative.

T3 Trust Income Tax and Information Return

Income earned in the deceased’s name in the year of death—but after the date of death—must be reported on a T3 Trust Income Tax and Information Return. The legal representative must file the T3 return and pay all balances owing no later than 90 days after the end of the year of the estate.

Consider filing optional income tax returns for the deceased individual

There are three optional income tax returns that may be filed for a deceased spouse which may eliminate or reduce income taxes otherwise owing:

  1. A return for rights or things;
  2. A return for a partner or proprietor; and
  3. A return for income from a testamentary trust.

By filing multiple returns, the legal representative may be able to split income earned by the deceased in the year of death among the applicable returns, and offset this income against certain additional deductions and tax credits.

The filing due dates for these returns and the payment of amounts owing are the same as those for a final T1 return, except in the case of the return for rights or things. The deadlines for a return for rights and things are the later of one year following the date of death or 90 days after the date at which a notice of assessment or reassessment was mailed in respect of the final T1 return.

Obtain a clearance certificate

The legal representative must ensure that all taxes owing for the year of death and all previous years are paid prior to making any distribution of property from the estate. To do this, they should obtain a clearance certificate from the CRA, which certifies that all amounts for which the deceased is liable to the CRA have been paid, or that the CRA has accepted security for the payment of amounts owing.

Tax consequences

Capital property

If the deceased spouse had capital property (for example, land and buildings, and securities such as stocks), a deemed disposition will occur based on the fair market value (FMV) of the property immediately before their death.

There is an exception to this rule in cases where capital property is left to the surviving spouse or to a qualifying spousal trust—any capital gain or loss will be deferred until the transferred property is disposed of by either the surviving spouse or the spousal trust. However, the estate’s legal representative may elect to have the transfer from the deceased individual to the surviving spouse take place at FMV. There may be significant tax advantages to making the transfer at FMV—for example, if the deceased had capital losses that have not yet been utilized.

RRSPs

When an individual dies, they are deemed to have collapsed their registered retirement savings plan (RRSP). The estate of a deceased spouse will be taxable on the FMV of the plan at that time; however, if the surviving spouse is the beneficiary of the deceased’s RRSP, the value of the RRSP can be included in their income, instead of being included on the deceased’s final tax return. The surviving spouse can then transfer the value of the RRSP to their own RRSP and avoid paying any tax on these funds until the funds are withdrawn from the plan.

TFSAs

Contributions to a tax-free savings account (TFSA), along with any income earned on the amounts contributed, accumulate tax-free; furthermore, these amounts are not taxable when withdrawn from the TFSA. By contrast, the earnings that accrue following the death of the TFSA holder are taxable.

However, if a deceased spouse named their surviving spouse as the “successor holder” in their TFSA contract, it is still possible to maintain the tax-exempt status of the TFSA earnings. Being named successor holder does not affect the surviving spouse’s TFSA contribution room—if they already had their own TFSA prior to their spouse’s death, they would be considered the holder of two separate TFSA accounts following said death.

If the surviving spouse is not designated as a successor holder but is instead designated as a beneficiary, payments out of the deceased’s TFSA can be transferred to the surviving spouse’s TFSA without affecting unused TFSA contribution room, subject to certain conditions and limits. In particular, the amount transferred cannot exceed the FMV of the deceased’s TFSA at the time of their death.

Lightening the burden

There are many decisions to be made and tasks to be accomplished after the death of a spouse. Being armed with a good understanding of what needs to be done may help make this difficult time less daunting. Anyone going through this process would also be well advised to talk to a tax adviser, as many situations are complex.

Audra Haber is a senior manager in the national tax practice of BDO Canada LLP.

David Mueller is a partner in taxation services for BDO Canada LLP (Vancouver).

Kam Nat is a senior manager in taxation services for BDO Canada LLP (Vancouver).

Footnotes

  1. servicecanada.gc.ca/eng/lifeevents/loss.shtml