Estate Tax Returns Explained: Which Ones an Executor Must File

If you have been named executor, you may be surprised by how many different tax returns can be connected to one death. The names and form numbers sound alike, and it is not obvious which ones apply to your situation.

This article walks through the final return, the optional returns, and the trust return for the estate, in plain language. Every estate is different, so use it as a map and have an accountant or lawyer confirm what fits yours.

The final T1 return: always required

A final T1 income tax return must be filed for every person who dies, and the deceased's legal representative is the one who files the returns. Who that is in your situation depends on the facts, so it is worth confirming with a lawyer.

If the person did not file a T1 for any tax year before the year of death, those earlier returns must also be filed. Outside Quebec, provincial tax is calculated on Form 428 in the T1 package for the province where the person lived at death.

The final return is also where many death-related tax rules show up, such as the deemed sale of property just before death and the inclusion of an unmatured RRSP in income.

Optional T1 returns: extra returns that can lower tax

Up to three optional T1 returns may be filed. They are not required, but filing them can reduce or eliminate tax, because the eligible income goes on the optional return instead of the final return.

• Rights or Things: write 70(2) on page 1. Rights or things are income earned but not received before death, such as unpaid salary or accrued bond interest. Capital gains are excluded.
• Partner or Proprietor: write 150(4) on page 1. It covers business income between the business's fiscal year-end and the date of death when the year-end is not December 31.
• Income from a Graduated Rate Estate: write 104(23)(d) on page 1. Income the deceased received from another person's graduated rate estate, generally on a T3 slip, between that estate's fiscal year-end and the date of death can be reported here.

Whether any of these helps depends on the person's income and assets. An accountant can usually tell quickly whether an optional return is worth preparing.

The T3 trust return for the estate

The T3 Trust Income Tax and Information Return reports income the estate earns after death that has not been paid to beneficiaries. It is not needed if the only post-death income is reported by a beneficiary, such as a CPP or QPP death benefit. If there is post-death income, it is reported in later years until the estate's property is fully distributed.

A T3 is generally required in these situations: the trust has tax payable, or it allocates income to beneficiaries and has income over $500, allocates more than $100 to any one beneficiary, makes a capital distribution, or allocates income to a non-resident beneficiary. A T3 may not be needed if the estate is distributed right after death or earns no income before distribution, though the final T1 is still required.

To file a T3 you need a trust account number. You can get one instantly through the Trust Account Registration online service, or by completing Form T3APP, and you must provide a signed copy of the trust document or the last will and testament.

Graduated rate estates and due dates

An estate can be a graduated rate estate for up to 36 months after death. It must arise on and as a consequence of death, remain a testamentary trust, and designate itself as the graduated rate estate in its T3 return for its first tax year ending after 2015. Only one estate can have this status for an individual, and the deceased's SIN must be on its T3 returns. Unlike most trusts, it can use a year-end other than December 31.

Penalties and what to do next

A late final return carries a penalty of 5% of the balance owing, plus 1% of the balance owing for each full month late, to a maximum of 12 months. The CRA also charges compound daily interest from the day after the due date. For T3 returns, an alternative penalty of $25 per day late, with a minimum of $100 and a maximum of $2,500, may apply even when there is no balance owing.

If a return is late because of a death in the immediate family, serious illness or similar circumstances, the CRA can cancel or waive penalties and interest, though meeting the criteria does not guarantee relief.

• Find out whether the deceased filed all prior-year returns.
• Gather slips, statements, and records of income earned before and after death.
• Mark the final return due date based on the date of death, and check for a business.
• Ask an accountant whether any optional return would reduce tax.
• Work out whether the estate will earn income that requires a T3.
• Do not distribute property until tax is dealt with; a clearance certificate comes later.

Frequently asked questions