Page 173 - A Canuck's Guide to Financial Literacy 2020

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It's important to file the final return on time as CRA charges a penalty of 5% on any taxes
owing plus 1% of the balance outstanding for each full month, up to a maximum of 12
months.

T1 Terminal Tax Return

The T1 return also known as the final return would include the taxpayer’s income from
January 1st up to the date of death. This would include investment and employment income
in addition to any accrued amounts. Dividends, interests as well as the fair market value of
all RRSPs/RRIFs must be reported in the final income.

RRSPs/RRIFs At Time of Death

At the time of death, a taxpayer is deemed to have received the fair market value of
their RRSP/RRIF as income which is to be taxed at their marginal tax rate. However, there
are exceptions to this as tax can be deferred by naming a qualifying beneficiary such as
your spouse or dependent child. In Quebec, a beneficiary must be named through your will.

▪ Naming Your Spouse as a Beneficiary – Upon death, your RRSP/RRIF investments
will be liquidated and the spouse may transfer the funds directly into their own RRSP
or RRIF on a tax deferred rollover. However, depending on your tax situation, such as
low income during the year of death, it could be beneficial to have the proceeds be
taxed on your final tax return or in your spouse’s hands in order to minimize your tax
payable.
▪ Naming Your Spouse as a Successor Annuitant – Successor annuitant applies to
your RRIF and upon death, the RRIF will continue to exist in your wife’s name. As a
successor annuitant, your spouse can control the timing of withdrawals and taxation.
▪ Naming a Dependent Child as a Beneficiary – Upon death, the value of your
RRSP/RRIF can be taxed in your hands or the beneficiary’s hands on the final tax
return which is advantageous as they would be more to likely have minimal income.

RRSP Deduction in Year of Death

In the final year of death, if the deceased taxpayer has contribution room, the executor can
make a contribution into a spousal RRSP. This will result in a tax deduction on the final
return of the deceased.

In addition to the final return, there are 3 optional tax returns that can be filed on behalf of
the deceased individual which can reduce the tax payable. By filing optional tax returns, the
deceased can claim personal tax returns credits more than once. This could result in tax
savings for the estate. These optional tax returns are:

▪ Testamentary Trust – If the deceased received income from a testamentary trust,
the income can be reported on a separate tax return.