You already know tax knowledge is power. Depending on your circumstances, tax knowledge can make or save you money. It’s no different when you’re filing a tax return for a deceased person.
Just like regular tax returns, options are available to maximize your return. As an executor of an estate (or another interested party), being aware of the options and how to use them are key to the most significant benefit.
In this post, we’ll explore the different types of optional returns for deceased persons, their benefits, and how to file the returns. If the details of your estate are complicated, it’s best to speak to a professional regarding the best route available in your circumstances.
What Are Optional Returns for Deceased Persons?
Optional returns can be filed along with the deceased's final return if the circumstances permit. You can file an optional return for income owed to the deceased after the date of death due to several reasons, whether it be for employment, a sole proprietorship or partnership, or a graduated estate.
What Is the Benefit of Filing Optional Returns for Deceased Persons?
Optional returns are beneficial as they can assist in reducing or even eliminating tax for the deceased. You can claim specific amounts more than once, split amounts between different returns, claim against particular kinds of income, etc.
Types of Optional Returns for Deceased Persons
There are numerous types of optional returns for deceased persons depending on your circumstances, and they each have their own purpose and include:
Return for Rights or Things
A return for rights or things includes amounts the deceased did not receive before death but would have received if the death hadn't occurred. These amounts often come from employment and other sources. CRA states that “employment rights or things are salaries, commissions, and vacation pay as long as both of these conditions are met:
The employer owed them to the deceased on the date of death
They are for a pay period that ended before the date of death”
Other rights or things include old age security benefits, unpaid dividends declared before the date of death, work in progress, bond interest earned, etc.
It's important to also note what would not be included in a return for rights or things. These include things such as elected split-pension amounts, land in the deceased’s inventory, property included in capital cost allowance, etc.
How to File your Rights or Things Return
Your rights or things return will be filed on a standard T1 form. The difference is that you will write “70(2)” in the top right corner of page 1 of the return. The return is due the later of either 90 days after CRA sends a notice of reassessment or one year after the date of death.
Return for a Partner or Proprietor
You would use this optional return if the deceased was a sole proprietor or a partner in a business. More specifically, you would use this type of return when the business' fiscal year does not align to a regular calendar year.
If the individual died after the fiscal year ended but before the end of the calendar year, you could show the business income on an optional return. This is optional. If you choose only to submit a final return, you can report all business income thereon.
How to File your Return for a Partner or Proprietor
You would file this optional return on a T1 form with “150(4)” noted in the top right corner of page 1 of the return. Further information regarding the amount of business income to be reported on the final return can be found in Part 3 of Form T1139, which can be found here. The due date for this type of return is the same as the final tax return.
Return from Graduated Rate Estate
If the deceased received income from a graduated rate estate, you could also file an optional return. Graduated rate estates have a fiscal period for their tax year, which usually doesn't follow a regular calendar year.
If the deceased died after the fiscal year for the graduated rate estate, but before the end of the fiscal year-end, you would report income from the end of the fiscal period to the date of death.
Again, this is considered an optional return. You can choose to report all income on the final return if you do so choose.
How To File Your Return for a Graduated Rate Estate
To file an optional return for a graduated rate estate, you would file a T1 form with “104(23)(d)” written on the top right corner of page 1 of the return. You must file this optional return and pay any amount owing by the later of the regular tax deadline for that year (end of April or June, if self-employed) or six months after death.
Take Advantage of Optional Returns
Now that you know the three types of optional returns for deceased persons, it's time to implement them!
First, consider which optional return would apply to the asset in question. Was the deceased a sole proprietor, a partner, or receiving money from a graduated estate? If so, then you’ll need to decide whether you’d be at an advantage to file a separate return.
If you’re not sure, we can help clarify your options. Contact us today to find out whether optional returns are a good option for your situation.