Tax for estates and deceased taxpayers

What happens to a person’s taxes at death?

At death, tax law deems the person to have disposed of all their property at fair market value immediately before dying. This deemed disposition triggers tax on accrued capital gains (rental properties, investment portfolios, private-company shares) on the deceased’s final return, even though nothing was actually sold.

Canada has no inheritance tax as such. It is the deceased, and then the estate, who are taxed, not the heirs on what they receive. The tax cost of a death can nonetheless be substantial when the estate holds property that has grown in value, and much of that cost can be managed through planning, both before death and after.

What is the deceased’s final tax return?

The final return reports the deceased’s income from January 1 to the date of death, together with the gains arising from the deemed disposition, at both the federal and Quebec levels. It is generally due by April 30 of the year following the death, or six months after the date of death, whichever is later.

Optional returns may be filed alongside the final return for certain types of income, known as rights or things, which in some cases spreads income across several returns and multiplies certain credits. Deciding whether these optional filings are worthwhile is part of the analysis the firm carries out to reduce the overall tax on the file.

How does the spousal rollover work?

The spousal rollover allows the deceased’s property to pass to the surviving spouse, or to a qualifying spousal trust, at its tax cost rather than at fair market value. Tax on the accrued gains is deferred until the spouse sells the property or dies.

The rollover applies automatically when its conditions are met, but letting it apply is not always the right answer. For some assets it can be better to elect out, to use available losses, to crystallize the lifetime capital gains exemption on qualified small business corporation shares, or to take advantage of the deceased’s tax rates. Making that election well is one of the most consequential decisions a liquidator faces.

How is the estate itself taxed?

From the date of death, the estate is a trust for tax purposes. The income it earns (interest, dividends, rent, gains realized during the settlement) is reported on a federal T3 return and on Quebec’s trust income tax return. The T3 is generally due within 90 days of the end of the estate’s taxation year.

An estate that qualifies as a graduated rate estate benefits, generally for its first 36 months, from graduated tax rates rather than the top rate that otherwise applies to trusts. Choosing the estate’s year-end and allocating income between the estate and the heirs directly affect the total tax paid.

Filing	What it covers	General deadline
Deceased’s final return	Income from January 1 to death, plus the deemed disposition	April 30 of the following year or six months after death, whichever is later
Optional returns	Certain income, including rights or things	Specific deadlines set by law
Estate T3 return	Income earned by the estate after death	90 days after the estate’s year-end

What is post-mortem tax planning?

Post-mortem planning covers the tax elections and reorganizations carried out after death to reduce the combined tax borne by the deceased, the estate and the heirs. Its main target is the double taxation that threatens private-company shares, the gain taxed on death, then tax payable again when the corporation distributes its assets.

Depending on the file, strategies may carry estate losses back against the gains on the final return, or reorganize the corporation so its value can be extracted without a second layer of tax. These measures come with strict windows, the analysis has to start early in the settlement of the estate, not after distributions have been made.

What does the liquidator do, and how does the firm assist?

In Quebec, the liquidator, the role known as the executor elsewhere in Canada, administers the estate, preparing the inventory, filing the tax returns, paying the debts, then distributing property to the heirs. A liquidator who distributes before obtaining the CRA’s clearance certificate and Revenu Québec’s authorization to distribute property can become personally liable for the estate’s unpaid taxes.

KB Fiscalité supports liquidators and heirs at every step, the final and optional returns, the estate’s T3 returns, tax elections, clearance certificates and responses to the tax authorities. Should a dispute or an audit arise, the firm also represents the estate before the CRA and Revenu Québec. The liquidator stays in charge of the estate. The firm secures the tax side.

Why create a testamentary trust?

A testamentary trust is a trust created by will that takes effect at death. It gives structure to how wealth is passed on, protecting minor or vulnerable heirs, staggering distributions over time, preserving family assets, or entrusting management to a trustee the family relies on.

Like other trusts, it is subject to the 21-year rule, which deems its property disposed of at regular intervals and calls for long-term planning. The firm designs the trust’s tax structure upstream, in coordination with the notary or lawyer drafting the will, and looks after the trust’s tax compliance afterward.

Why bring an estate file to KB Fiscalité?

KB Fiscalité inc. pairs a tax lawyer, Thierry Bouchard, with a tax accountant, Ante Kumanović, in Vaudreuil-Dorion, a combination that covers both the legal and the accounting dimensions of a death file. The firm serves Vaudreuil-Soulanges, Greater Montreal and clients across Quebec, and its professionals are members of the APFF.

For support from the moment the estate opens, reach the firm at (514) 394-0848 or info@kbtax.ca.