The executor/administrator is required to finalize the estate income tax.
The Income Tax Act, 2000 requires that every administrator, executor and trustee (the "responsible representative") obtain a Final Clearance Certificate from Canada Revenue Agency (CRA) before distributing to the beneficiaries any property under their control. The responsible representative can be held personally liable if assets are distributed prior to the receipt of the final clearance certificate.
The executor or administrator should review the last five years of the deceased's income tax returns and financial information. In some instances, it is necessary to file prior income tax returns, which may take significant time to gather the information required to complete the return.
The following is the process for estate income tax, unless the estate is insolvent:
- T1 date of death return (for the period from January 1, to the date of death).
- Annual T3 Return(s) (to be filed annually for the year(s) after the date of death).
- If real property or other estate assets do not need to be sold to pay estate debts, a Clearance Certificate to Date of Death or Partial Clearance must be issued by CRA before the assets can be distributed to beneficiaries.
- After all real property and estate assets are sold or transferred to beneficiaries, all prior returns have been filed and assessed, and all tax has been paid, a windup date can be selected. At this time, the final T3 income tax return must be filed. It can take three to eight months to receive a Notice of Assessment for this return.
- After the Notice of Assessment is received for the final T3 income tax return, an application will be made to the CRA for a Final Clearance Certificate.
- It can take three to six months for the Final Clearance Certificate to be issued. This clearance certificate covers income tax liability up until the windup date.
- Until the Final Clearance Certificate has been received and all income tax owing has been paid, funds cannot be distributed to beneficiaries.
- After the Final Clearance Certificate is issued, it may be necessary to file a final T3 return from the windup date until the release date. If all of the beneficiaries reside in Canada, it might be possible to allocate the interest to the beneficiaries for this time period. If there is a beneficiary that resides outside of Canada, an NR4 Return must be filed and the non-resident withholding tax (Part XIII tax) must be submitted to CRA. An NR4 slip must be sent to the beneficiary.