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Deferral of Tax Payments on Death

Subject: Tax Payments on Death Number: 05-05 Date: 1/28/2005

If the proper elections and arrangements are made, tax payments on death can be deferred.

There is a subsection in the Income Tax Act that allows for the deferral of tax payments upon the death of an individual. When an individual passes away, they are deemed to dispose of all their assets at fair value. There will be taxes on any accrued capital gains and any income inclusions from RRSP's or RRIF's. Subsection 159(5) allows for the tax on death to be paid over ten years. There are however a number of conditions:

The deceased's legal representative must file an election by filing form T2075 before the time that the deceased individual's terminal tax return is due. This is the later of April 30 or six months after the individual's death.

The legal representative must furnish the Minister with security acceptable to the Minister for the payment of the taxes on death.

The amount that can be deferred is only the taxes that are payable upon death. Therefore, if an individual earned income during the first part of the year and then passed away, the taxes on that income earned while the individual was alive cannot be deferred. Instead, the taxes that can be deferred are taxes on death such as the deemed capital gains and the inclusion of pension income mentioned above.

The tax payments must be ten equal consecutive annual instalments with the first instalment payable on the day when the terminal tax return is due. Each subsequent instalment must be paid on the anniversary of that day. In most cases, this will be April 30 of each year.

While the tax is not payable immediately upon death, there will be interest charged on the balance outstanding.

The election must be filed and arrangements must be made with the Minister before the terminal tax return and initial payment is due. Therefore, this is something that must be dealt with quickly in many situations.

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