Report Income, Transfers, and Dispositions — Montreal CPA Firm Near You: Final Return Income, Optional T1 Income, T3 Estate Income, Capital Gains, and Registered Plan Reporting

One of the most complex responsibilities a legal representative faces after someone dies is reporting income correctly. The CRA requires income earned up to the date of death to be reported on the Final Return, and income earned after death to be reported either by the estate or by beneficiaries, depending on the circumstances. Determining which return to file, which slip belongs where, how to handle foreign income, and how to calculate capital gains on deemed dispositions can be overwhelming without guidance.

This guide explains how to report income on the Final Return, optional T1 returns, and the T3 Trust Income Tax and Information Return. It also outlines the treatment of RRSPs, FHSAs, RRIFs, pensions, self-employment income, investment income, rental income, and agricultural or fishing income. Understanding these rules ensures that the estate avoids reassessments, pays only what is required, and claims all allowable deductions and credits.

Legal and Regulatory Framework

Under the Income Tax Act, the legal representative must file a Final Return for the deceased, reporting all income earned up to the date of death. Income that would otherwise be included on the Final Return may be shifted to certain optional T1 returns, but only if the income qualifies and is reported within the appropriate period.

After death, the estate becomes a trust for tax purposes. Income earned by the estate must be reported on a T3 Trust Income Tax and Information Return unless the income is paid or payable directly to the beneficiaries. Some payments, including employer death benefits and CPP/QPP death benefits, may be taxed differently depending on who receives them.

Capital property—including investments, real estate, and personal belongings—has special reporting rules. When someone dies, the Income Tax Act treats most assets as having been sold at fair market value, creating a deemed disposition that may trigger capital gains.

Foreign income, RRSP/RRIF values, FHSAs, business income, farm and fishing income, and rental properties all require precise documentation and allocation between returns.

Key Court Decisions

Courts have consistently upheld the CRA’s authority to demand accurate reporting of income in the year of death and for the estate thereafter. Decisions involving deemed dispositions confirm that fair market value must reflect actual market conditions at the date of death, and courts have rejected arbitrary valuations. Rulings involving optional returns reinforce that income must be eligible to be shifted and must be reported consistently.

Court cases dealing with RRSP/RRIF rollovers emphasize that tax treatment depends on beneficiary designation and eligibility. Similarly, decisions addressing foreign income stress the obligation to report worldwide income up to the date of death—even if foreign tax systems treat income differently.

Why CRA Targets This Issue

The CRA pays close attention to income reporting after death because errors create significant tax gaps and administrative complexity. Common issues include:

• failing to report all pre-death income
• misreporting capital gains on deemed dispositions
• incorrectly allocating income between the Final Return and optional returns
• missing foreign income
• rental or business income underreported
• incorrect handling of RRSP withdrawals or death benefits
• misunderstanding investment income rules
• T3 income not reported for the estate
• failure to access CRA data for the deceased

These errors can delay clearance certificates, increase tax payable, or create long-term problems for beneficiaries.

Mackisen Strategy

Mackisen supports legal representatives in determining exactly which income belongs on which return. Our approach includes:

• reviewing tax slips, bank records, brokerage statements, and business accounting
• reconciling pre-death income vs. post-death income
• identifying eligibility for optional T1 returns
• precisely calculating deemed dispositions and capital gains
• managing RRSP, FHSA, and RRIF reporting
• completing the Final T1 Return, optional returns, and the T3 Return
• determining when the estate must file and when income can pass directly to beneficiaries
• resolving foreign income reporting
• ensuring self-employment, rental, agriculture, and fishing income is properly categorized
• using Represent a Client to obtain missing slips and prior returns

Mackisen ensures the estate’s income is reported accurately and efficiently so that the representative can proceed confidently toward the clearance certificate.

Real Client Experience

One executor managing a spouse’s estate was confused about dividing investment income between the Final Return and the estate. Mackisen reviewed investment statements, separated pre-death and post-death income, reported gains on deemed dispositions, and filed the required returns correctly.

Another client inherited a rental property. We calculated pre-death rental income, post-death rental income, capital gains, and T3 reporting for the estate’s portion. This prevented a reassessment and ensured fair distribution among beneficiaries.

In cases involving foreign pensions and offshore investments, we coordinated reporting to avoid double taxation and ensured compliance with CRA foreign income rules.

Farm and fishing estates often involve multiple income types. We prepared T2042 and T2121 statements and reconciled seasonal income split between pre- and post-death periods.

Common Questions

Do I include income received after the date of death on the Final Return?
No. Only income earned up to the date of death belongs on the Final Return unless reported on an optional T1 return.

Where do I report income earned after death?
Usually on the T3 Trust Return for the estate, unless specific rules allow reporting it by a beneficiary.

What are common income types on the Final Return?
Employment, pensions, CPP/QPP, OAS, investment income, RRSP/RRIF income, FHSA income, rental income, business income, and capital gains.

What slips do I need?
T4, T4A, T4A(P), T4RSP, T4FHSA, T5, T3, T2125, T5013, rental statements, investment statements, and more.

How do I calculate capital gains?
Fair market value at the date of death minus adjusted cost base. Assets are deemed disposed at death.

Is foreign income reported?
Yes. Worldwide income must be reported up to the date of death.

Do FHSAs have special rules at death?
Yes. FHSA income can become taxable; slips T4FHSA and related codes must be reviewed.

Does the estate always need a T3 Return?
No. Only when the estate earns income after death or receives certain payments.

How do I get missing slips?
Through CRA’s Represent a Client system.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps businesses stay compliant while recovering the taxes they’re entitled to. Whether you’re filing your first GST/QST return or optimizing multi-year refunds, our expert team ensures precision, transparency, and protection from audit risk.