This week I was reminded of the perils of non-compliance, and thought it worthwhile to remind readers of a potential pitfall to be avoided. We are all aware of the many tasks that have to be completed in the course of administering an estate, some obviously on a much more timely basis than others. While there are many items that need immediate attention, worrying about the deceased’s taxes is not usually one of them. This “not immediately worrying about taxes” could be a costly mistake.
While the deadline for filing the deceased’s terminal return is the well-known “later of 6 months after the date of death and April 30 of the year following death”, the deadline for the return required to be filed on the death of the beneficiary of a spouse trust is a trap for the unwary. Proposals introduced in 2014 to have the gain resulting from the deemed disposition on the death of the spouse beneficiary of a spouse trust taxed in the hands of the deceased spouse, rather than in the spouse trust, received much scrutiny and criticism, and their ultimate non-adoption was much heralded. However, there were other provisions that were part of that legislative package that did get adopted. One such provision is the deemed year end of the spouse trust at the end of the day of the spouse’s death.
What this means is that the return reporting any gain on the assets in the spouse trust must be filed within 90 days after the death of the spouse, rather than within 90 days after the end of the calendar year. As we all know, in the flurry of everything else that is going on when a death occurs, this is really not a lot of time. Firstly, the accountants responsible for filing the tax return need to be made aware of the death of the spouse. Personally, I would like to think that calling my accountant would not be the first thing that my family would think of doing following my death! Secondly, financial information related to values and relevant tax costs needs to be gathered and analyzed. In a world of digital record-keeping, this may not be a difficult task, but determining the cost base of property in a spouse trust is not always a simple task, given the age of many of the relevant records. It may also be necessary to obtain a valuation report. So, as you might imagine, even if one is aware of the looming deadline, meeting it may be something else. Even if you start working on this return the day after the death, you may be unable to meet the deadline.
If you think that the Canada Revenue Agency will be sympathetic in circumstances where the return is filed within 90 days after the end of the calendar year (the former deadline) and only impose interest, you are mistaken. CRA is prepared to levy penalties in circumstances where the return is filed after the new 90- day deadline, even if it is filed within time under the prior deadline. Given the magnitude of the gain that is often inherent in spouse trusts, the amount of the late-filing penalty can be significant. Those of us who do planning must inform our clients of this deadline, and those of us who assist with estate administration must be aware of it and build it into the list of items that executors need to focus on very shortly after death.
While some things, like wine and cheese, improve with the passage of time, the likelihood of compliance with this filing requirement does not.