How to File a Final Income Tax Return After Death

Losing a loved one is never easy, and we’re sorry for your loss. 

When grieving, managing a loved one’s final affairs can add even more stress during an already difficult time. 

Making a will allows you to appoint someone you trust to take on these responsibilities, including filing your final tax return with the Canada Revenue Agency (CRA). 

This guide will help executors or estate administrators navigate the final tax return process and help make sure the deceased’s affairs are in order and their estate is settled smoothly.

What is a final income tax return?

Under Canadian tax law, a final income tax return is required to report all income earned by a deceased person up until the date of death. 

This is the T1 Income Tax and Benefit Return, also known as the Final Return.

This tax return ensures that any taxes the deceased owes are properly paid before the estate is distributed to beneficiaries.

In some cases, additional T1 optional returns or a T3 trust return may be required for income earned by the estate after death.

When are optional T1 returns or a T3 trust return required?

In addition to the final T1 return, an executor may need to file additional tax returns depending on the type of income the deceased received before and after their passing. 

These include optional T1 returns and a T3 Trust Income Tax and Information Return (T3 return).

Optional T1 returns

Optional T1 returns allow executors to report certain types of income separately from the final return, which can help reduce the estate's overall tax burden.

Filing these returns can sometimes result in tax savings by spreading income across multiple returns, maximizing tax credits, and lowering the overall tax rate.

There are three types of optional T1 returns:

1. Return for Rights or Things: Used to report income owed to the deceased at the time of their death but was not yet received. This includes:
   
   • Unpaid salary, commissions, or vacation pay
   • Old Age Security (OAS) or Canada Pension Plan (CPP) benefits due but not received
   • Dividends declared before death but paid after
   • Bond interest that accrued before death but was not yet paid
2. Return for a Partner or Proprietor: Used if the deceased was a business owner, partner in a partnership, or self-employed and had a fiscal year that didn’t align with the calendar year. This return allows business income earned before death to be reported separately.
3. Return for Income from a Testamentary Trust or Other Separate Sources: If the deceased had specific types of income, such as gains from a registered retirement income fund (RRIF) or proceeds from an employee profit-sharing plan, this return may be necessary to separate the income from other earnings.

Note: The option T1 Return for Rights or Things is due one year from the person’s date of death.

T3 Trust return

This is required because, once a person passes away, their assets no longer belong to them but instead become part of their estate, which is considered a separate taxpayer.

A T3 Trust Income Tax and Information Return (T3 return) is required when the deceased’s estate earns income after death. 

Executors must file a T3 return if the estate generates income from:

• Interest, dividends, or rental properties
• Capital gains from the sale of assets
• RRSP or RRIF withdrawals that continue to accrue earnings before going to beneficiaries

Unlike the final T1 return, which covers income earned up until the date of death, the T3 return tracks income earned by the estate after the estate is formed. 

This return must be filed annually until the estate is completely distributed and closed.

Who is responsible for filing the final tax return?

The legal representative of the deceased is responsible for handling their tax affairs. This is usually either:

• The executor named in their will
• A court-appointed estate administrator, if no will exists or no executor was appointed

This tax is not the responsibility of the deceased’s next of kin unless they are appointed in either of the above roles. 

Additional resources for if you’ve lost a parent →

To file, the representative must provide documents such as

• The deceased’s death certificate
• Probate documents, if required by CRA
• Proof of authority to act on behalf of the estate, shown as an appointment through the deceased’s will or a grant of probate

Key deadlines for filing the final income tax return

The deadline to submit a final income tax return and pay any balances owing depends on when the deceased passed away;

Missing these deadlines can lead to penalties and interest on unpaid taxes owed. Staying organized and starting early can help avoid unnecessary fees.

Guide to filing the final income tax return

1. Gather necessary documents and information

Before filing a final return, collect all relevant financial documents, including:

• T-slips such as employment income, pensions, vacation pay, and investment earnings
• Bank and investment statements
• Receipts for medical expenses, charitable donations, or other deductions

2. Determine all sources of income

All of the deceased’s income earned before their death must be reported, including:

• Employment income and vacation pay
• Pensions, death benefits, and RRSP withdrawals
• Investment income and capital gains
• Foreign assets or earnings, if applicable

Any income after the date of death would be declared in a T3 return.

3. Identify applicable deductions and credits

An executor can try to reduce taxes owed to help maximize the estate's value. Common types of deductions could include:

• Medical expenses: A claim can be made for expenses paid in any 24-month period that includes the date of death if the expenses were not claimed for any other year
• Charitable donations: Donations to registered Canadian charities or other qualified donees may be eligible for tax credits
• RRSP contributions: If the deceased named a spouse or dependent child as the direct beneficiary of their RRSP, their financial institution can transfer the funds tax-free without the executor needing to claim the amount on the final tax return

4. Submit the return

Finally, the executor is responsible for filing the final return. They accomplish this;

• Online through the CRA’s website
• By mail using a paper return
• Through a tax professional

What happens after filing the final tax return?

Once filed, the CRA will review the return and issue a Notice of Assessment.

If applicable, they will process a clearance certificate to confirm all tax obligations are met before the executor can proceed with the estate’s distribution.

The CRA may also address any follow-up requests or additional information needed.

What is a CRA clearance for a deceased person?

A CRA clearance certificate confirms that all taxes owed by the deceased and their estate are paid, allowing the executor to distribute the estate.

A clearance certificate allows an executor to distribute assets without the risk of being personally responsible for unpaid amounts the person who died might owe to the CRA. 

Under the Income Tax Act or Part IX of the Excise Tax Act, once an executor has a clearance certificate, the liability for any unpaid tax rests on the estate or its beneficiaries to pay off.

Learn more about clearance certificates →

How long does CRA take to process a final tax return?

If the final return was submitted electronically, through NETFILE or EFILE, the CRA will typically process it and return a Notice of Assessment in two weeks.

Note: Online tax software does not currently support the submission of final returns or optional T1 returns. If an executor is filing final returns themself, they must mail them to their tax centre.

For final returns submitted through mail-in, the CRA can take four to eight weeks to process it and issue a Notice of Assessment.

What is the death benefit on a final return?

If the deceased contributed to the Canadian Pension Plan (CPP) for at least three years before their passing, their executor can apply for the CPP death benefit. 

The CPP death benefit provides a one-time payment of $2,500 to help with the deceased’s funeral costs.

Executors must apply for the benefit within 60 days of a person’s date of passing to receive this benefit.

Depending on who ultimately receives it, the CPP death benefit amount is either:

1. Reported by the estate of the person who died on a T3 Trust Income Tax and Information Return (T3 Return), or 
2. Reported by the beneficiary of the person’s estate on their T1 Income Tax and Benefit Return (T1 Return)

Read more about tax returns for death benefits →

Common mistakes to avoid when filing a final tax return

• Not notifying financial institutions or pension providers, leading to missed income slips like pension payments, death benefits, or investments
• Forgetting deductions or credits that could reduce tax liability
• Filing late, which leads to penalties and additional interest
• Failing to apply for a clearance certificate, which could delay estate distribution

Appoint your own executor today

The executor’s role is essential for quickly and efficiently filing final tax returns and settling an estate. 

It’s important to choose someone you trust to handle your estate honestly and capably. 

Whether they’re a family member, friend, or professional, having a capable executor can make all the difference in how efficiently your estate is distributed.

With Willful, you can easily and affordably name executors, guardians and beneficiaries in your will. 

And if you ever change your mind on who your executor should be, you can make updates anytime for free!

Start your will for free today →