Estate Tax Returns in Ontario: Which Ones Are Needed and When

After a death, more than one tax return may be needed. Some are required, some are optional, and each has its own deadline.

This article explains the difference between the final T1, the optional returns and the estate's T3 return, so you can see which ones may apply and when they are due.

The final T1 return

A final T1 Income Tax and Benefit Return must be filed for every person who dies. It reports income and property gains up to the date of death. The legal representative, usually the executor named in the will, deals with CRA, and sends a copy of the death certificate or a funeral director's statement of death and a copy of the will.

If there is no will or executor, Form RC552, Register as Representative for a Deceased Person, is used.

Optional returns

Optional returns split certain income away from the final return. Filing them can lower total tax because certain credits and deductions can be claimed more than once or split between returns, and each return starts again at the lowest tax brackets.

• Rights or things return: reports amounts that would have been income if the person had realized them in life. These include salary and vacation pay for periods ended before death but paid after it, OAS and CPP/QPP for the month of death paid after death, and dividends declared before death but not received. Capital gains are excluded.
• Partner or proprietor return: for a sole proprietor or partner whose fiscal year does not end on December 31. It reports business income from the fiscal year-end to the date of death.
• Graduated rate estate return: reports income the deceased received from another person's graduated rate estate, usually on a T3 slip, between that estate's year-end and the date of death.

If the legal representative transfers a right or thing to a beneficiary before the election deadline, the rights or things election does not apply to it, and the beneficiary reports it as their own income when received.

The estate's T3 return

A T3 Trust Income Tax and Information Return is generally filed for the estate if it realizes any gain or receives any payments after the death. A return may not be needed if the estate was distributed right after the death and earned no income before then.

Amounts allocated to beneficiaries are generally taxed in their hands and reported on T3 slips, while income the estate keeps is taxed in the estate. A graduated rate estate can choose a non-calendar year-end, up to one year after the date of death.

Due dates at a glance

Any balance owing must still be paid by the regular payment due date where the business extension applies. If the person died before filing the previous year's return, that return is due 6 months after the date of death. A surviving spouse's own return is due on the later of their normal due date and 6 months after the death, though any balance must still be paid by April 30 to avoid interest.

When a graduated rate estate is wound up, its tax year ends on the date of the final distribution, and the final T3 and balance are due no later than 90 days after that date.

What to do next

• Confirm the date of death and work out which final return deadline applies.
• Check whether the person had a business, partnership interest or unpaid income that may qualify for an optional return.
• Decide whether the estate will earn income or sell assets, which may require a T3.
• Keep track of each deadline, since late filing carries a 5% penalty on the balance owing plus 1% for each full month late, up to 12 months.
• Ask an accountant whether optional returns would reduce the total tax.

CRA also charges compound daily interest on unpaid amounts from the day after the due date. For a T3 return, an alternative penalty of $25 a day applies, with a minimum of $100 and a maximum of $2,500.

Frequently asked questions