The due date for the terminal return depends upon the date of the deceased’s death:1) For a death prior to November, the terminal return is due by the following April 30, or June 15th if the deceased had business income. The deadlines are the same for individuals alive throughout the tax year.2) For a death in November or December, the terminal return is due six months from death (ITA, s. 150(1)). There is also a specific rule in respect of the return for the year preceding the year of death, which the personal representative will often have to file if the deceased has been ill before death or has died early in the year.

Upon the death of a taxpayer, a T3 trust tax return is prepared, as well as a report of the income earned by the estate after the taxpayer’s death and before the distribution of the estate to beneficiaries are to be submitted.An estate cannot allocate its capital gains to its non-resident beneficiaries. Instead, they are to be taxed within the trust. In view of this, if the estate is immediately distributable, the estate could calculate its income, allocate all of the income to the beneficiaries (by issuing a T3 supplementary slip), take a deduction from its income of the amounts so allocated, and in the end file a return showing that there is no taxable income.It seems that the personal representative is required to file a return for income of the estate as a trust in situations where the trust generates income (ITA, s. 150(3); Income Tax Regulations, s. 204(1)). The administrative policy of the CRA is not to insist on the trust to file a return in circumstances when:

Registered Retirement Savings Plans (RRSPs)Like non-depreciable capital property and depreciable capital property, a spousal rollover is available for RRSPs. Money directly received by the spouse (as opposed to the estate of the taxpayer) by way of beneficiary designation is deemed to be income to the spouse and not the deceased. It is then possible for the taxpayer’s spouse to either include the proceeds of the RRSP in his or her income or, more likely, purchase an RRSP in his or her own name with the proceeds and thereby continue the tax deferral (ITA, s. 60(1)).The surviving spouse should make sure to make the RRSP contribution in, or in respect of, the same year that the income is deemed to have been received by redemption. Supposing that the death occurs in November and redemption occurs in December, a spouse would like to make the contribution by February 28 in the next year. When the proceeds of an RRSP are receivable by an estate, the estate and the spouse may jointly elect that the amounts are deemed as received by the spouse, thereby allowing the tax deferral to be preserved (ITA, ss. 146(8.2)(b),

Cleansing Tainted TrustsA qualifying spousal trust could inadvertently lose its special status by inadvertently putting capital in the hands of persons other than the spouse. In such situations, the Income Tax Act of Canada provides relief in two ways.First, if the only third party receiving money is receiving that money for the purpose of the payment of any estate or income taxes with respect to the trust property, the trust is deemed to not  be tainted (ITA, s. 108(4)).Second, if the trust is tainted only because it provides for the payment of other specified debts, the ITA sets out a procedure for “cleansing” the trust.  Essentially, the law regards trust assets with sufficient value to pay those debts to be regarded as having been disposed of at fair market value, and the remaining assets may be rolled over.

Wills containing benefits held in trust for minor children would usually include clauses authorizing the estate trustee to distribute from the child’s trust directly to the child’s parent, custodian, or guardian. With the exception of a relatively small amount, the Office of the Children’s Lawyer is likely to question the validity of such distribution.Normally, an estate trustee cannot delegate fiduciary obligations to someone else, despite the presence of such clauses in wills expressing the testator’s intention that such delegation can occur. Considering the limited permissive distributions pursuant to s. 51 of the CLRA, only an appointed trustee can possess and spend trust funds on behalf of the minor child. Should a parent intend that the custodian or guardian receive distributions from the estate trustee for the benefit of a minor child, the will should expressly appoint him or her as a sub-trustee for such purpose, giving rise to all the obligations that flow from the appointment of a trustee. If this is not done, the estate trustee could be charged for breach of trust. In any event, the custodian or guardian is accountable as a de facto trustee.

No one, including parent or custodian, has an inherent right to possess or control property or assets otherwise belonging to a minor child. They can, however, apply to the court to be appointed as a guardian of that minor child’s property. While it may seem rare for minor children to own property of any significant value, many minors come into vast fortunes through testamentary gifts from others. A financial windfall for a minor can occur when a surviving parent dies intestate or with a valid will failing to authorize the estate trustee to retain a minor child’s inheritance in trust and administer the trust during the child’s minority. In such an instance the estate trustee is generally required to pay into court the estate funds to which the child is entitled. Likewise, an untimely death may entitle a minor child to life insurance proceeds (where a trust has not been established for those proceeds when making a beneficiary designation), or may give rise to the payment from the so-called “orphan’s” benefits from publicly or privately funded pension schemes. Without a court appointed guardian, such entitlements (with the exception of amounts qualifying under s. 51 of the CLRA) would be paid into court to the credit of the minor child and be held there during the child’s youth or until a subsequently appointed guardian of property makes a successful application to control those monies.

Guardians, Custodians, and the Children’s Law Reform ActConventionally, “guardians” of minor children are whomever the parent has named in his or her will to take care of, and have “custody” over, the children after the parent’s death. In view of this, such appointees are “custodians” in waiting and not “guardians” at all, despite the fact that “custodian” is not a term specifically defined in the Children’s Law Reform Act (CLRA). A “guardian” is a person who has guardianship of the property of the minor.According to s. 61(1) of the CLRA, the father and the mother of a minor child are equally entitled to custody of the child. So long as a parent has not lost custody of a minor child by order of a court, no court order is required to bestow the right of custody on a surviving parent. After the enactment of the Children’s Law Reform Amendment Act, 1982, on October 1, 1982, the father and mother of a minor child have been permitted by will to “pass on” the statutory right to custody which each enjoys. Under s. 61(4)(a) of the CLRA (which is the consolidated

Court Hearing and JudgmentA person who is concerned about an adult who appears to be mentally incapable and at serious risk may apply to the court to appoint a guardian for that person, or may contact the Ontario Public Guardian and Trustee to ask them to conduct an investigation and possibly ask the court to appoint a guardian.The points for the court to consider are found ss. 55(2)(a), (b), and 57(3)(a), (b) and (c) of the Substitute Decisions Act. According to these subsections, to appoint a guardian of the person, the judge must include in his or her judgment an observation that the person is incapable in respect of some or all of the functions referred to in s. 45 and, consequently, needs decisions to be made on his or her behalf by a person authorized to do so (SDA, s. 58(1)). According to s. 58(3), the judgment should specify whether the guardianship is full or partial. A full guardian is appointed only if the person is incapable of all the functions in s. 45 (SDA, s. 59(1)). Otherwise, partial guardianship is given in the judgment regarding some, but not all, of the functions set out in s. 45 (SDA, ss. 60(1), (2)). It is open to the court to appoint joint guardians (SDA, s. 57(4)) simultaneously, or two or more persons directed to act as guardian for specific time periods, if it makes sense in the circumstances.

RolloversAccording to the Canadian Income Tax Act there are two circumstances under which death need not bring forth a deemed realization of non-depreciable capital property or depreciable capital property:1) Outright transfer to a spouse, or transfer to a qualifying spousal trust; and2) Intergenerational transfer of farm property.In these examples the transferee would acquire the property at the deceased’s tax cost. It allows a deferral, but not an elimination, of the capital gain (and recaptured depreciation) until an actual or deemed realization by the transferee takes place. This is preferred because taxes are deferred and can be properly planned for. With respect to RRSPs, outright transfers to spouses also can avoid a deemed disposition.Transfers

Personal Liability of Personal RepresentativesThe purpose of the personal liability provision is to encourage personal representatives to ensure that they do not overlook their obligations, such as to file tax returns on behalf of an estate and to provide the CRA with a direct source for the payment of tax. Taking into account such provisions of the ITA, a prudent personal representative looking to avoid personal liability should settle the deceased taxpayer’s estate after the assessment and audit process of the CRA. Due to this, significant delays can occur before the estate was fully distributed. It is very difficult to administer an estate on this basis.As an alternative, many personal representatives assume the personal liability described above by making interim distributions and retain a reserve to meet and exceed anticipated taxes. They do not distribute the reserve until the clearance certificate is in hand. Otherwise, if the personal representative is on good terms with the beneficiaries (and considers them to be solvent), he or she may be prepared to distribute the entire estate prior to the receipt of a clearance certificate and to accept the undertaking of the beneficiaries to indemnify the personal representative to the extent that the personal representative is subsequently found to be liable for additional tax.