Graduated Rate Estate: The 36-Month Rule for Executors

Estates often earn income after the person dies, from investments, rent or other sources. Who pays tax on that income, and at what rate, depends partly on the estate's tax status. For many estates the best-known status is the graduated rate estate, or GRE.

This article explains in plain words what a GRE is, the rules that keep it, the 36-month limit, and what changes afterward. The tax rules are detailed, so use this as a guide for questions to bring to an accountant, especially if the estate is large or complicated.

What a graduated rate estate is

A graduated rate estate is an estate that meets certain conditions and is taxed on its income at the same graduated rates as individuals. This is the main benefit: income is taxed in steps rather than all at one flat rate. The status matters most when the estate earns meaningful income while it is being administered.

To qualify, the estate must be a testamentary trust, include the deceased's SIN on its T3 returns, and designate itself as the GRE in its T3 return. Only one estate per individual can be a GRE. A GRE can also claim donations in the year they are made or in any of the following 5 years, or carry them back.

The 36-month limit

An estate can be a GRE only for up to 36 months following the death. After that, the status ends even if the estate is still open. This limit makes timing important. If the estate is likely to run past three years, because of a dispute, a hard-to-sell property or a long administration, the executor should plan for what comes next.

A GRE also has a deemed tax year-end on the day it ceases to be a GRE, which is no later than 36 months after death. The T3 return and any balance owing are due within 90 days of that year-end. If the estate ends sooner by final distribution, the year ends on that date and the return is due 90 days later. Late-filing penalties can apply.

Choosing the first year-end and filing the T3

The legal representative can set the GRE's first tax year-end at any date up to one year after death. A GRE's T3 return is due 90 days after the trust's tax year-end, or after final distribution. Picking a year-end is a planning choice, and an accountant can help weigh it against the estate's income and the executor's timeline.

Trustees apply for a trust account number online or with Form T3APP, and the number must be on every T3 return. A trust filing for the first time needs the number before filing electronically, and a $100 penalty is noted for not providing it. It is wise to apply early so the first return is not delayed.

Do not forget the deceased's own filings. The final T1 return is due April 30 of the following year for deaths from January 1 to October 31, or six months after death for deaths from November 1 to December 31. A separate Rights or Things return is due on the later of one year after death or 90 days after the final return's assessment.

Income and property inside the estate

Different kinds of income land on different returns. Rental income from January 1 to the date of death goes on the final return, while rental income earned by the estate after death is reported on line 8 of a T3 return. Rental income is calculated on Form T776.

Capital property is deemed disposed of just before death at fair market value, and that is reported on Schedule 3 of the final return. A later sale by the estate is taxed on the sale price less the fair market value reported on the final return. Transfers to a spouse, common-law partner or spousal trust generally occur at cost unless the fair market value choice is made on the final return.

These rules interact with the GRE rules, so selling assets inside the 36 months can have different tax effects than selling later. Ask an accountant to model the options before you sell.

What happens after 36 months, and what to do next

When GRE status ends, the estate has a deemed year-end and a return due within 90 days. If the estate continues as a testamentary trust that is not a GRE, it has a December 31 year-end. Whether further changes to the rate of tax apply depends on the estate's facts, so confirm with an accountant before the 36 months run out.

• Write down the date of death and calculate the 36-month date.
• Decide the first tax year-end, up to one year after death, with an accountant.
• Apply for the trust account number early.
• Make sure the T3 designates the estate as a GRE and includes the deceased's SIN.
• Calendar the T3 due date, 90 days after each year-end.
• Consider whether the estate can be wrapped up and distributed before the 36 months end.
• Keep records of income, expenses and donations.

Frequently asked questions