Losing a loved one is never easy and dealing with the taxes afterwards can be overwhelming. While filing some returns are mandatory, others are optional. It is important to not overlook optional tax returns as they can reduce or even eliminate taxes owed by the deceased. In this blog, we will summarize the different types of optional returns, filing due dates and the benefit of filing them.

Types of Optional Returns

In most cases, the CRA only requires one final return but there are situations where filing one or more optional returns can result in tax savings for the deceased. By filing optional returns, you may be able to lower taxes by using some tax credits multiple times, splitting them across returns, or matching them against specific kinds of income.

There are three types of optional returns in addition to the final tax return that can be filed for the deceased taxpayer. We will review the benefits of filing these optional returns in the next section.

1. Return for “right or things”: “Right or Things” refers to income that the deceased has earned before death but has not been paid out. Examples include:

- Employment income owing by employer

- Unpaid dividend declared before death

- Bond interest earned before death, but not paid nor reported in previous years

- Old age security and employment insurance benefits not received before date of death

Some items not included are

- Amounts accumulating regularly (i.e. interest from bank account)

- RRSP/RRIF income

If you plan to file this optional return, all “right or things” must be reported. It cannot be split between the final tax return and the return for “right or things”. The only exception is transferring any “right or things” to a beneficiary before the filing deadline. In this case, the beneficiary must report these items on their returns.

2. Return reporting business income: If the deceased was a business partner or sole proprietor and their business had a fiscal year-end different from the calendar year-end, there is an option to file a return to report the business income earned between fiscal year-end up to the date of death.

3. Return for income from a graduated rate estate (GRE): A trust that earns income is normally taxed at the highest marginal tax bracket. There is an exception for certain trusts that applies to the first 36 months after the date of death. This exception is commonly known as the graduated rate estate – GRE. The GRE must be a “testamentary” trust and only one estate per deceased person can qualify as GRE. Income in the GRE are taxed at graduated tax rates.

You can chose to file an optional return for income received by the deceased from a GRE if the fiscal year-end of the trust is different from the calendar year-end. You can file the income received between taxation year-end and date of death on a separate return.

Filing Deadlines

The deadline to file the optional returns are the same as the final tax return with the exception for the “right or things” return. The deadline is dependent on the date of death. For deaths from January 1st to October 31st, the due date is April 30th of the following year (June 15th if the deceased is self-employed). The deadline for deaths occurring in November and December is six months after the date of death.

For the “rights or things” return, the filing deadline is the later of 90 days after the CRA sends the notice of assessment for the final tax return, and one year after the date of death.

Benefits of Optional Returns

Now that we understand the optional returns, one must determine where the effort to file these optional returns are worth it:

1. As each optional return is taxed as an individual entity at the graduated rates, the estate of the deceased can use the lowest tax rate more than once to reduce the tax lability at death.

2. There is a potential to claim certain tax credits more than once. You can claim the following personal tax credits in full in the final return and on each optional return:

- Basic personal amount

- Age amount

- Spouse or common law partner amount

- Amount for eligible dependent

- Canada caregiver amount for spouse or common-law partner, or eligibile dependent age 18 or over

- Canada caregiver amount for other infirm dependents age 18 or over

- Canada caregiver amount for infirm children under 18 year of age

In short, if the deceased has the option to file optional returns, it is a worthwhile consideration as it may reduce the tax liability at death.