Executor income tax responsibilities hold paramount importance in the administration of the estate. We cannot stress enough on the part that handling the estate affairs and financial responsibilities comes with accountability, and an executor must understand the income tax responsibilities before taking charge as an executor.
In most cases, the will of the deceased has the name of the executor. Usually, the executor is a trusted person—maybe a friend, lawyer, or relative. The passing away of a loved one is indeed a challenging time, and tangling between an emotional phase and financial responsibilities arises for the executor.
In Ontario, Canada, the role of an executor starts from the death of the individual, and the executor must dive into the intricate world of tax and regulation to understand the executor’s income tax responsibilities for a smooth estate transition.
Asset distribution, debt settlement, income tax, and compiling the financial assets are the core responsibilities of an executor. However, Ontario’s legal framework has a proper series of tax-related duties that an executor must fulfill.
As an executor, you are the administrator of the deceased’s financial legacy, and you must honor the deceased’s last wishes but also make a way through the income tax obligation. In this article, we will learn about executor income tax responsibilities in Ontario and how to navigate through the process.
Who is an Executor?
An executor is the one who is legally appointed to carry out the wishes of a deceased, and also, an executor manages the financial details of an estate. An executor’s primary role is to ensure that the financial assets are distributed according to the will. An executor plays an important role in settling the financial affairs or the estate, paying off the debt and paying the income tax on time. Moreover, an executor is also accountable for maintaining the financial records and belongings of the deceased.
Suppose Emily has accumulated various assets over the years. She has two houses, investments, and personal belongings as well. In Emily’s, she has appointed Martin—a close friend- the estate’s executor. Emily passes away; now, Martin becomes responsible for carrying out the instructions in the will.
What are the responsibilities of an Executor of an Estate?
Being an executor comes with tons of responsibilities. Yes, an executor also gets a financial reward, but the responsibilities are complex, and everything needs to be done in a proper protocol. Below is a list of the core responsibilities of an executor.
1. Probate Process:
The probate process varies from estate to estate and the law as well. The executor is responsible for initiating a probate process to discuss the legalities of the financial assets. Also, the probate process validates the will in the court legally. The probate process allows the executor to take the authority to act as a legal executor on behalf of the estate.
2. Locating the Will:
The executor and a pile of financial responsibilities must locate the original will in a safe place. Yes, an executor’s responsibility is to take care of the will. If the will is lost, the estate decision will be followed by intestacy laws.
3. Funeral and Burial Arrangements:
The funeral and burial arrangements are often specified in the will of the deceased. The executor must arrange the burial and funeral as per the wish of the deceased; the finances of the deceased will bear the expenses. However, the family of the deceased must be notified of the wishes.
4. Valuation of the Assets:
The executor must take charge and identify the deceased’s inventory, assets, and belongings. Everything must be valued for accurate distribution of Bank accounts, real estate, investment, etc. The executor must compile a list of all the assets to be presented in the court.
5. Notifying the Creditors:
After the individual passes away and the probate process is done, the executor must inform the creditors, financial institutions, and potential beneficiaries about the person’s passing. The creditors can claim the estate, and the executor must settle the claim before proceeding with the will.
6. Managing the property:
The executor is the legal guardian of the property and the assets of the estate. This includes managing and maintaining the real estate matter and investment and ensuring the valuable items’ safety and security.
7. Filing Tax Returns:
One of the core responsibilities of an executor is to file the tax return from the beginning of the tax year to the date of the death. If any additional tax returns are in the estate’s name, the executor must clear them during the administration period. The legal heirs cannot claim their share before filing the tax returns.
8. Distribution of the Assets:
During the probate, and once approved, the executor must keep the beneficiaries in the loop. Once the debts and taxes are cleared, by following the instructions in the will, the executor must distribute the remaining assets to the beneficiaries.
9. Closing the Estate:
Once the probate process is done, the debts and taxes are settled, and assets are divided and distributed according to the wishes of the deceased. The executor must prepare a final report and accounting of the estate activities. Once the court approves the report, it closes the estate.
Who pays income tax for the deceased?
The income tax responsibilities for the deceased fall on the shoulders of an executor of the estate. The executor must clear all the taxes before proceeding with the distribution of the assets.
1. Final Return:
After the probate process, the executor must clear the debts and settle the estate’s tax returns. The return covers the period from the beginning of the tax year to the date of the individual’s death. Simply put, the income earned by the deceased up until the death should be reported in this return. This includes employment income, pension, investment, or any income under the deceased. The taxes are calculated based on the overall income and deductions for the partial tax year.
2. Payment of the Taxes:
The taxes owed on the final return are paid from the deceased’s assets. The payment of taxes must be paid before distributing the assets to the legal heirs of the estate. The executor must manage the funds and the tax obligations.
3. Estate Taxes:
Now, this part is a bit technical. If the estate continues to generate income even after the deceased’s death. Any revenue generated from the rental property or any asset; will come under post-death income. The executor is also responsible for calculating and paying the additional post-death tax.
The tax rules and regulations as per the estate and the deceased might be a bit complicated. The executor can seek advice from the professional or the accountants or tax experts for accurately handling the deceased person’s income tax matters.
From filing the final return to managing tax credits and deductions, each phase of Executor Income Tax Responsibilities plays an important role in the comprehensive administration of the estate. Effective estate management extends beyond asset allocation, avoiding common mistakes executor makes in probate, and requiring a deft understanding of the tax landscape to navigate with competence and confidence.
Yes, an executor is responsible for filing the taxes and returns for the deceased. The taxes are settled for the funds of the deceased. However, the taxes must be paid before distributing the assets to the legal heirs.
Well, it depends from region to region. In Ontario, Canada, beneficiaries generally do not have to pay income tax on inheritances received from an estate.
Yes, the fees paid from the estate’s money are subject to income tax in the year it was received.
Meet Doug, a seasoned financial planner with over 35 years of experience in providing trusted advice and planning for retirement, estates, income tax, and investments. As a Chartered Accountant (CPA CA), Certified Estate Advisor (CEA), Certified Financial Planner (CFP®), and Elder Planning Counsellor (EPC), Doug has the expertise and knowledge to guide and support executors through the estate processing journey.