Death and Taxes
Optional returns can lower the final owe
by Jamie Golombek
When someone dies, in addition to filing the deceased's final tax return for the period from January 1st to the date of death (known as the "terminal return"), the executor or legal estate representative may choose to file up to three "optional returns" on which he or she may report certain types of income of the deceased that ordinarily might have been reported on the terminal return.
The advantage of doing so can be to lower (or, in some cases, even eliminate) the amount of tax owing for the year of death. This is possible because the income on each return filed is subject to its own set of graduated tax brackets.
In addition, certain basic amounts can be claimed more than once (on each return filed). These amounts are the:
basic personal amount;
spouse or common-law partner amount;
amount for an eligible dependant;
amount for infirm dependants age 18 or older; and
Other amounts such as the disability, tuition, education amounts as well as any charitable donations must be split or allocated among the returns filed for the year of death.
The three optional income tax returns that may be filed in addition to the terminal return are if the deceased received income from rights or things (as defined below), a business operated as a partnership or sole proprietorship or a testamentary trust.
This column will focus on the most common of the three, the rights or things return and, in particular, on a recent favourable Canada Revenue Agency (CRA) technical interpretation letter released late in 2006.
What are "rights or things"?
Rights and things are simply amounts that had not yet been paid to the deceased person at the time of his or her death that, had the person not died, would have been included in his or her income when ultimately received.
Note that if you choose to file a special rights or things return, you must include all rights or things on that return. You're not able to pick and choose to report some on the terminal return and others on the special return.
Some common examples of rights or things related to employment are salary, commissions and vacation pay that were owed to the deceased on the date of death and related to a pay period that ended before the date of death.
Other non-employment rights or things can include Old Age Security (OAS) benefits due and payable before the date of death, uncashed matured bond coupons and, most commonly, declared but unpaid dividends that were not yet received by the deceased prior to the date of death.
The CRA has commented that some items are specifically not considered to be rights or things, such as amounts that accumulate periodically (e.g. bank account interest), bond interest accumulated between the last interest payment date before the person died and the date of death and RRSP income.
Lump-sum pension payment
Late last year, the CRA released a technical interpretation (2006-0192051I7) that discussed whether a lump sum retroactive pension payment could be considered an item for inclusion on a deceased's rights or things return.
Specifically, the CRA was asked about a situation wherein a pension plan (the plan) advised a survivor spouse that it made an error when it calculated the annual inflation protection increases of her late husband's pension. The error was apparently made many years before his death after he began receiving his pension.
The plan recalculated the difference in pension and issued a cheque, including interest, to the estate along with a T4A showing the lump-sum payment and the income tax withheld.
The question the CRA was asked was whether this lump-sum payment could be included in the rights or things return.
The CRA responded, quoting its Interpretation Bulletin IT-212R3, "Income of Deceased Persons - Rights or Things", which defines rights or things as including "amounts that have been earned but have not been included in income ..". For the pension payment to be properly considered a right or thing, "the deceased must have had a clear right to the amounts at the time of death".
The CRA therefore determined that since it was the pension plan administrators that had concluded, after the pensioner's death, that they had miscalculated the amount of pension benefits that were payable to him before his death, it was an amount owing to him at death since he "had been receiving insufficient amounts over the years".
The lump-sum amount was therefore permitted to be included on the rights or things return.
How is the rights or things return filed?
There is no special tax form, per se, for this return. Rather, the notation "70(2)" should be clearly printed in the top right corner of page one of the general tax return. This reference refers to the rights and things subsection of the Income Tax Act under which authority the special return is being filed.
The return is due by the later of 90 days after the CRA issued a Notice of Assessment for the terminal return or one year after the date of death.