Considerable tax savings can be realized from electing to file a rights or things return after the death of a loved one in addition to a final tax return.
When a loved one dies the last thing you want to think about is how to save tax. But the “rights or things” tax return could save the estate some money. You have a year to file a rights or things return.
If a loved one has named you executor of the estate, you will need to file a terminal or final tax return with CRA for the year in which the individual dies. All of the income he or she earned during the year up to the time of death must be reported in addition to the value of any “rights or things” owned by the deceased.
Rights or things are amounts that had not been paid to the person at the time of death that would have otherwise been included in his/her income when received had the person not died.
Subsection 70(2) of the Income Tax Act gives you the option to file a separate income tax return for the estate to report the rights or things amounts. The major advantage of filing the 2 separate tax returns is that some of the deceased’s personal tax credits can be claimed in full on each return.
This could lead to sizeable tax savings provided each return has sufficient tax payable to make use of the credits.
For example, rights or things of a deceased farmer might include the following:
- Supplies on hand, inventory (including harvested farm crops and livestock on hand) and accounts receivable – if the deceased used the cash method of reporting for income tax purposes
- Interim or final Canadian Wheat Board or Western Grain Stabilization Act payments when the payment is announced before the date of death
- Unpaid dividends declared before the date of death
- Uncashed matured bond coupons
- Salary, commissions and vacation pay owed at the time of death that were for a pay period that ended before the date of death
Rights or things do not include amounts that accrue periodically, such as:
- Interest from a bank account
- Bond interest accumulated between the last interest payment date before the person died and the date of death
- Income from a registered retirement savings plan
- Eligible capital property and capital property
- Land in the deceased’s business inventory, and Canadian or foreign resource properties.
All of the above items must be reported on the regular terminal tax return.
Some deductions and personal tax credits can be claimed on the regular terminal return only. These include:
- Capital gains deduction
- Net capital losses from other years
- Non-capital losses from other years
- Allowable business investment losses, business investment tax credits and refunds of business investment tax credits
- Registered retirement savings plan deductions
- Child care or attendant care expenses
- Support payments
- Amounts transferred from a spouse, and carrying charges and interest expenses.
Likewise, if you elect to file a separate rights or things tax return, you must report the total value of all rights and things on that return – other than those transferred directly to beneficiaries under subsection 70(3). (See below.) In other words, rights or things cannot be split between the regular terminal return and the elective separate return.
However, you can split some items between the 2 returns and you can claim some amounts and deductions in full on both the separate rights or things and regular terminal tax returns. Amounts you can claim in full on both returns are:
- Basic personal amount
- Age amount
- Spouse or common-law partner amount
- Eligible dependant amount
- Amounts for infirm dependants age 18 or older, and the caregiver amount
The following amounts can be split between the 2 returns so long as you do not exceed the total amount that could be claimed on the regular terminal return:
- Disability amount for the deceased
- Disability amounts for dependants other than the spouse
- Interest paid on student loans
- Tuition and education amounts for the deceased
- Tuition and education amounts transferred from a child
- Medical expenses
- Charitable donations
Some deductions/amounts, such as CPP contributions and EI premiums, can be claimed only on the tax return on which the related income was reported.
Here is an example of how expenses can be split between the regular final and separate rights or things returns.
The year a woman dies she has $9,000 in total medical expenses. The total of her net income on the two returns is $40,000. Of that, $30,000 is reported on the regular final return and $10,000 on the separate rights or things return.
Two-thirds of her medical expenses ($6,000) are claimed on the final return and one third ($3,000) on the rights or things return. The medical expense reduction must also be split in the same proportion as the expense split. Since the medical expense reduction is the lower of $1,884 or 3% of the total net income, in this case the reduction is 3% of $40,000 or $1,200.
|Medical expenses claimed||$6000|
|Less 2/3 of $1200||$800|
|Credit amount for medical expenses||$5200|
Rights or Things Return
|Medical expenses claimed||$3000|
|Less 1/3 of $1200||$400|
|Credit amount for medical expenses||$2600|
|Total credit amounts for medical expenses||$7800|
If you decide to file a separate return for rights or things you have to file it by the later of 90 days after CRA mails the Notice of Assessment or Notice of Reassessment for the final return or one year after the date of death.
In some cases you can delay paying part of the tax owing from rights or things, but CRA will charge interest on the unpaid amount from the day after the due date to the date you pay the amount in full.
Be aware that rights or things can be transferred to a beneficiary provided it is done within the time frame for filing the separate elective return. If you elect to do this, the rights and things amounts will be included in the beneficiary’s income when realized – and not in the returns filed for the deceased.
The issue of filing a separate rights or things tax return for a deceased taxpayer should be discussed with the estate’s accountant or tax advisor.
Considerable tax savings can be realized from making such an election, but it requires a tax specialist to ensure the returns are completed properly.
If you would like a free consultation to find out how FBC can help you with your small business tax needs, call 1-800-265-1002, or email today.