Is income earned by an estate taxed in Ontario?

Yes — an estate that earns income after the date of death is itself a taxpayer in Canada. The estate is treated as a trust and must file a T3 Trust Income Tax and Information Return for each year (or portion of a year) it earns income. Federal and Ontario provincial tax both apply to income earned by the estate.

For the first 36 months after death, a qualifying estate may be treated as a Graduated Rate Estate (GRE), which means the estate can use the same graduated federal tax brackets as an individual rather than being taxed at the top marginal rate that applies to most trusts. This is a valuable designation. Once the GRE period ends, or if the estate does not qualify, the estate is taxed at the highest marginal rate on all income.

Income earned before death is reported on the deceased's final T1 return (the terminal return), due six months after death or by the normal April 30 deadline, whichever is later. Income earned after death — from estate investments, rental properties, business income, etc. — goes on the T3 return. Beneficiaries may receive income distributions from the estate that they must report on their own T1 returns. Estate administration with significant assets almost always benefits from a tax professional coordinating the terminal T1, the T3 filings, and any clearance certificates from the CRA.