The death of a taxpayer is an emotionally difficult time, and unfortunately, it also creates important tax filing obligations. In Ontario and across Canada, a deceased individual’s tax affairs do not end at death. Instead, the Canada Revenue Agency (CRA) requires the filing of a final tax return, commonly known as a Terminal Return.

This guide explains what a terminal tax return is, who must file it, what income must be reported, key deadlines, and tax planning opportunities available to estates and surviving families in Ontario.

What Is a Terminal Tax Return?

A terminal tax return is the final personal income tax return filed for a deceased taxpayer. It reports all income earned from January 1 up to the date of death, along with certain death-triggered income inclusions that would not arise during life.

The purpose of the terminal return is to:

• Settle all income tax liabilities
• Allow the estate to distribute remaining assets
• Obtain a CRA Clearance Certificate

Who Is Responsible for Filing the Terminal Return?

The responsibility falls on the legal representative, which may include:

• Executor named in the will
• Estate administrator
• Court-appointed representative

The legal representative must:

• Notify CRA and Service Canada of the death
• Provide an official death certificate
• Stop government benefits and credits
• File all required tax returns

⚠️ Important:

Any outstanding CRA balances must be paid before assets are distributed to beneficiaries.

Income Reported on the Terminal Return

The terminal return includes:

• Employment income
• Self-employment or business income
• Rental income
• Investment income (interest, dividends)
• Pension income

This income is reported from January 1 to the date of death.

Deemed Disposition at Death (Major Tax Impact)

Under Canadian tax law, a taxpayer is deemed to have disposed of all capital property immediately before death at fair market value.

This may trigger:

• Capital gains on real estate
• Gains on investments (stocks, mutual funds)
• Gains on private corporation shares
• Other valuable personal property

This deemed disposition can result in significant tax liability on the terminal return.

Spousal Rollover – Important Tax Relief (ITA 70(6))

When assets are transferred to a surviving spouse or common-law partner, they generally qualify for an automatic tax-deferred rollover under Income Tax Act section 70(6).

Key Benefits:

• No immediate capital gains tax
• Tax deferred until the spouse sells the asset or passes away
• Election can be made asset by asset

Example:

John purchased an investment property for $500,000.

At death, the property’s value was $900,000.

Scenario A – Transfer to spouse (Sarah):

• No tax at John’s death
• At Sarah’s death (FMV $1,200,000), capital gain of $700,000 is taxed

Scenario B – Transfer to non-spouse beneficiary:

• Capital gain of $400,000 taxed on John’s terminal return
• Estate must pay tax before distribution

Filing Deadlines for the Terminal Return (Canada & Ontario)

Date of Death

Filing Deadline

January 1 – October 31

April 30 of the following year

November 1 – December 31

6 months after date of death

Missing deadlines can result in interest and penalties, payable by the estate.

Why Filing the Terminal Return Is Critical

Before beneficiaries can receive assets, the estate must:

1. File all required returns
2. Pay all CRA balances
3. Obtain a CRA Clearance Certificate

Without this certificate, legal representatives may become personally liable for unpaid taxes.

Rights or Things Return (Additional Tax Planning Opportunity)

Certain income items may be considered “rights or things”, such as:

• Unpaid salary or bonuses
• Declared but unpaid dividends
• Commissions earned but not received

These can be:

1. Reported on the terminal return, or
2. Reported on a separate Rights or Things Return

Benefits of a Separate Return:

• Lower marginal tax rates
• Ability to claim credits twice
• Potential tax savings for the estate or beneficiaries

Special Tax Rules in the Year of Death

Credits (Claimed in Full)

• Basic personal amount
• Age amount
• Spouse or eligible dependent
• Caregiver credits

No proration required.

Capital Losses

Unused capital losses in the year of death can:

• Offset any type of income (not just capital gains)
• Be applied to the prior year return

Charitable Donations

• 75% net income limit does not apply
• Donations may be claimed in year of death or prior year

Medical Expenses

• Medical expenses from the last 24 months may be claimed
• Often results in higher tax relief

Estate Planning & Tax Tips for Ontario Families

• Have a valid will in place
• Consider estate planning before death
• Engage an estate lawyer early
• Work with a CPA to minimize terminal tax exposure
• Plan liquidity to cover tax triggered at death

Frequently Asked Questions (FAQs)

What is a terminal tax return in Canada?

A terminal return is the final personal tax return filed after a taxpayer’s death, reporting income up to the date of death and certain deemed dispositions.

Who files the final tax return after death?

The executor or legal representative of the estate is responsible for filing the terminal return.

Does CRA tax assets at death?

Yes. CRA applies a deemed disposition at fair market value, which can trigger capital gains unless a spousal rollover applies.

Is a clearance certificate required?

Yes. A CRA clearance certificate confirms all taxes are paid before assets are distributed.

Can tax be reduced on death?

Yes. Through spousal rollovers, capital loss utilization, charitable donations, and rights-or-things planning.