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As you may be aware, when an individual dies, a final personal income tax return is required to be filed by the executor on behalf of the deceased.

This final income tax return is also known as a terminal tax return. The terminal tax return generally includes taxable income earned by the deceased from January 1 of the year of death up to their date of death.

Note that personal tax credits such as the basic tax exemption, spousal exemption and age credit are not prorated on the terminal tax return for the number of days an individual was living in their year of death.

In addition to reporting income received on the terminal tax return, an executor has the option of including certain types of taxable income of the deceased on a separate tax return called a "rights and things" return.

Generally income that was owing but unpaid as of the date of death is considered as a "rights and things". Common types of income that may be considered as rights and things include:

Old Age Security benefits that were due and payable before the date of death;

uncashed matured bond coupons;

bond interest earned to a payment date before death, but not paid and not reported in previous years;

unpaid dividends declared before the date of death;

supplies on hand, inventory, and accounts receivable if the deceased was a farmer or fisherman and used the cash method;

livestock that is not part of the basic herd and harvested farm crops, if the deceased was using the cash method;

and work in progress, if the deceased was a sole proprietor and a professional who had elected to exclude work in progress when calculating his or her total income.

The two main benefits of declaring income considered as "rights and things" on a separate tax return are double use of personal tax credits and double use of an individual's low tax rate.

The terminal tax return and the "rights and things" return both allow use of some of the personal tax credits such as the basic tax exemption, spousal exemption and age credit.

For example, if in their final year the deceased had regular taxable income and income considered as "right and things", the estate can "double dip" and earn income up to the basic Tax Exemption Limit, tax-free on both tax returns.

Since the "rights and things" return is taxed as a separate person at graduated tax rates, the lowest tax rate can be used twice (terminal tax return and "rights and things" return) to minimize the estate's tax liability.

As an alternative, if the "rights and things" income is transferred to a beneficiary within one year of death or 90 days after assessment of the terminal tax return (whichever is later), then the "rights and things" income can be included on the tax return of the beneficiary rather than the "rights and things" return.

If you have any questions or require clarification of any of the issues discussed in this document, do not hesitate to discuss these with your financial advisor.

Note: The material in this column is intended as a general source of information only, and should not be construed as offering specific tax, legal, financial or investment advice.

Individuals should consult with their personal tax advisor, accountant, or legal professional before taking any action based upon the information contained in this column.

* David Konning is an investment and retirement planner at Royal Bank. If you would like to reach him, please e-mail him at David.Konning@rbc.com or phone 856-0406.

Financial planning services and investment advice are provided by Royal Mutual Funds Inc., a member company under RBC Investments.

Royal Mutual Funds Inc., Royal Bank of Canada, Royal Trust Corporation of Canada and The Royal Trust Company are separate corporate entities which are affiliated.