Estate taxes - Suviving Spouse

Tax Filing When Your Spouse Passes Away

The loss of a spouse is a profound life event. Beyond the personal grief, there are immediate administrative and tax responsibilities that require attention to ensure compliance with the Canada Revenue Agency.

When a spouse passes away and leaves a surviving spouse, the tax rules are distinct. They often allow for the tax-free rollover of assets which can simplify the process compared to other estate situations.

At KLCA, we specialize in assisting surviving spouses with these specific filings. Our fees for this service typically start at $1,500 and up for the couple depending on the complexity of the assets involved.

Responsibilities of the Surviving Spouse

The surviving spouse typically acts as the legal representative or executor. This role carries several critical duties that must be managed to avoid personal liability.

• You must officially notify the Canada Revenue Agency of the date of death and update your own marital status.

• Payments for the Old Age Security and Canada Pension Plan of the deceased must be stopped immediately. You should also apply for the Survivor’s Pension and the CPP Death Benefit.

• You will need to arrange for the transfer of joint assets, bank accounts, and investments into your name.

• As the representative, you are responsible for ensuring all required tax returns are filed and any outstanding debts are paid before the estate is fully distributed.

RRSP and RRIF Transfers

A common concern involves Registered Retirement Savings Plans and Registered Retirement Income Funds.

The general rule is that the full value of an RRSP or RRIF is taxable on the final return of the deceased. However, tax laws allow for a tax free rollover to the surviving spouse. This defers the tax until the surviving spouse withdraws the funds in future years.

If the deceased did not name you directly on the plan contract, the funds may flow through the estate first. We utilize the Section 60(l) provisions to ensure you still receive the tax deferral.

Your financial institution will prepare and manage the T2019 election form required to facilitate this transfer without immediate tax withholding. You simply need to ensure the funds are transferred to your own registered plan by December 31 of the year following the death.

Because of this rollover, the deceased pays no tax on these funds. You, as the surviving spouse, will include the income on your tax return but claim an offsetting deduction. You only pay tax when you eventually withdraw money from your own plan.

Required Tax Filings

We will prepare the necessary returns to ensure the tax accounts of the deceased are closed properly.

The Terminal T1 Return

This is the final personal tax return for the deceased. It reports income from January 1 up to the date of death. We report the spousal rollover of capital assets on this return to ensure no capital gains tax is triggered at this time. The CRA treats the deceased as if they sold all their assets at fair market value immediately before they passed away. We calculate the resulting capital gains or losses on items such as non registered stocks second properties and business interests. If these assets are going to a surviving spouse we ensure the spousal rollover is correctly applied to defer the tax. Our responsibilities include:

• CRA authorization of legal representatives and authorized representatives

• Review of will and list of assets and determine tax treatment

• Calculation of part-year income and possible deemed dispositions

• Optimize credits (medical 24-month period, DTC, unused losses, etc.)

• Disability tax credit application and transfers

The T3 Trust Return (If beneficiary is other than the surviving spouse)

If the assets of the deceased do not rollover to the surviving spouse after the date of death a T3 Trust Return may be required for the estate. We will review your specific situation to determine if this filing is necessary.

When a spouse inherits assets the tax law allows for a rollover at cost. When children inherit assets the CRA treats those assets as if they were sold at fair market value on the date of death. This often creates a period of time where the estate holds the assets before they are legally transferred to the children.

If a parent passes away and leaves an investment portfolio or a rental property to their children the estate will likely hold those assets for several months during the probate process. Any interest dividends or rental income earned during this period belongs to the estate and a T3 Trust Return must be filed to report that income.

If the estate sells a house or stocks to distribute cash to the children any increase in value from the date of death to the date of sale is a capital gain. This gain must be reported on a T3 return. Even if the assets are transferred directly to the children the estate may still need to file to report the final distribution of capital.

If the children are minors or if the will specifies that the children should receive their inheritance at a certain age such as twenty five the estate becomes a long term testamentary trust. This trust is a separate taxpayer and must file a T3 return every year until the assets are fully distributed to the children.

Optional Filings and Services

Return for Rights or Things

If the deceased had income earned but not yet paid at the time of death, such as old age security or vacation pay, or a bonus, we can file a separate return. This allows us to claim the Basic Personal Amount a second time and access lower tax brackets to reduce the overall tax liability. 

Clearance Certificate Application

Once all returns are assessed and taxes are paid, we can prepare an optional application for a Clearance Certificate. This is a formal document from the CRA confirming that the deceased has no further tax liability. It provides you with protection from future reassessments and confirms your work as the executor is complete.