The Terminal T1 Return: Executor Guide to Final Tax Filing in Canada
When a Canadian taxpayer passes away, their legal representative, often an executor or estate administrator, is responsible for filing a Terminal T1 Income Tax and Benefit Return, commonly called the Final Return. This return captures all income earned from January 1 of the year of death up to the date of death, and it plays a critical role in estate settlement, tax compliance, and CRA clearance.
Filing Deadlines
Standard deadline: April 30 of the year following death (or June 15 if the deceased ran a business).
Extended deadline: Six months after the date of death, if that’s later than the standard deadline.
What’s Included in the Final Return
Employment and pension income up to the date of death.
Accrued but unpaid income, such as interest on GICs or declared dividends.
Deemed disposition of capital property: All capital assets (e.g., real estate, investments) are considered sold at fair market value on the date of death, triggering capital gains or losses.
RRSPs and RRIFs: Fully taxable unless rolled over to a spouse or financially dependent child.
Unused credits and deductions: Basic personal amount, age amount, and others may still apply.
What’s Not Included in the Final Return
Some assets and payments are excluded from the Terminal T1 and handled separately:
TFSA balances: Not taxable and not reported; post-death growth may be taxable to the beneficiary.
Life insurance proceeds: Tax-free if paid to a named beneficiary; not reported on the Final Return.
RDSP balances: Not automatically included; treatment depends on plan structure and beneficiary status.
Jointly held assets: May bypass the estate; not reported unless beneficial ownership is unclear.
Employer death benefits: Taxable to the recipient, not the deceased.
Deemed Disposition at Death: What It Means
CRA treats most capital property as if it were sold at fair market value immediately before death, even though no sale occurs. This may trigger capital gains or losses on:
Real estate (including principal residence and secondary properties)
Non-registered investments (stocks, mutual funds, crypto)
Personal-use property (art, jewelry, collectibles)
These gains are reported on Schedule 3, and the inclusion rate remains at 50% for 2025.
Right of Survivorship and Spousal Rollovers
If property passes to a surviving spouse or common-law partner, either directly or via a testamentary spousal trust, the deemed disposition can be deferred if:
The spouse is a Canadian resident at the time of death
The property becomes “locked-in” for the spouse or trust within 36 months
No other person can benefit from the trust during the spouse’s lifetime
In these cases, the adjusted cost base (ACB) transfers without triggering tax, and the capital gain is deferred until the spouse disposes of the asset or dies.
Right of survivorship (e.g., joint tenancy) does not automatically trigger tax if the surviving spouse is the joint owner. However, beneficial ownership must be confirmed, especially for estate filings, to avoid CRA scrutiny.
Planning Opportunities
Here are key strategies to reduce tax exposure:
Principal Residence Exemption (PRE): Even if the entire gain is exempt, the executor must still file:
Schedule 3
Form T1255 (Designation of a Property as a Principal Residence by the Legal Representative)
Lifetime Capital Gains Exemption (LCGE): For qualifying small business shares or farm/fishing property, the LCGE can shelter up to $1.25 million of capital gains if the disposition occurs on or after June 25, 2024.
Electing Out of Spousal Rollover: May allow use of LCGE or offsetting capital losses at death.
Capital Loss Carrybacks: Losses reported on the T3 Trust Return can be carried back to the Terminal T1 to offset gains.
Optional Returns That May Reduce Tax
CRA allows up to three optional T1 returns to split income and reduce tax:
Return for Rights or Things: Income earned but not received before death (e.g., unpaid salary, declared dividends).
Return for a Proprietorship or Partnership: For business income earned before death.
Return for a Graduated Rate Estate (GRE): Optional T1 return for the deceased’s share of GRE income earned before death. Note: This is separate from the T3 Trust Return filed by the estate.
Each optional return has its own set of graduated tax brackets and may allow duplicate claims for personal tax credits, potentially reducing overall tax liability.
Clearance Certificate: Protecting the Executor
Before distributing estate assets, the executor should request a CRA Clearance Certificate to confirm that all taxes, interest, and penalties have been paid. Without it, the executor could be personally liable for unpaid amounts.
Common Pitfalls
Missing optional returns: Can lead to overpayment of tax.
Incorrect deemed disposition reporting: May trigger CRA review.
Failure to file on time: Penalties and interest may apply.
Not requesting a clearance certificate: Risk of personal liability.
If you're an executor or advisor navigating a Terminal T1 filing, reach out and I can help you stay compliant, minimize tax, and protect your liability.