Graduated Rate Estate 36-Month Rule for Ontario Estate Trustees

If you are an estate trustee in Ontario, the estate is a separate taxpayer from the person who died. How it is taxed in the first few years can make a real difference to the amount left for beneficiaries.

One of the most important tax concepts is the graduated rate estate. It comes with a time limit, and estates that take a long time to wind up can run into it. This article explains the basics in plain language.

What a graduated rate estate is

For tax purposes, a testamentary trust is a trust or estate generally created on and because of a person's death. The estate that arises on an individual's death can be a graduated rate estate, often shortened to GRE.

There can be only one graduated rate estate for a deceased individual. That matters if the person left several trusts in their will. A separate trust in the will is not a second GRE, but it may still be taxed at graduated rates in another way, such as a qualified disability trust, if the conditions are met.

The 36-month limit

An estate can be a GRE for up to 36 months after the death, and no longer. The clock starts on the date of death, not on the date the estate certificate is issued or the date you start acting. In Ontario, getting a certificate can take time, so some of the 36 months may be used up before you can do much.

To get the status, the estate must designate itself as a GRE on its first T3 return. It must also report the deceased's Social Insurance Number on its returns during the 36-month period.

When the estate stops being a GRE, it has a deemed tax year-end on that day. That means a tax year can end earlier than you expected, and a T3 return may be needed for that short period.

What changes when the status ends

As a general rule, a trust's taxable income is taxed at the highest individual percentage, the top personal rate. Graduated rate estates and qualified disability trusts are excluded from that rule. In other words, while the estate keeps GRE status, it is not taxed at the flat top rate under that rule.

If administration runs past 36 months, the estate is no longer a GRE. From then on, income kept in the estate may be taxed at the top rate under the general rule, unless the estate or a trust within it qualifies for another exception. Tax rates and brackets change from year to year, so an accountant can tell you what the numbers look like for the year in question.

Other routes to graduated rates

A testamentary trust that arose on a death can also be taxed at graduated rates as a qualified disability trust, or QDT. It must jointly elect with one or more beneficiaries on Form T3QDT and meet the other conditions. If a beneficiary with a disability is involved, ask an accountant early whether this could apply.

Some trusts follow different timing rules. A trust is generally deemed to dispose of its capital property at fair market value every 21 years, but spousal, alter ego and joint partner trusts have their first deemed disposition when the beneficiary spouse dies, or on the later of the two deaths. These rules are separate from the 36-month GRE limit.

Filing and what to do next

A T3 return is due no later than 90 days after the trust's tax year-end. Late filing can be costly. The penalty is 5% of the unpaid tax, plus 1% of the unpaid tax for each full month the return is late, up to 12 months. Where no tax is owing, filing late costs $25 a day, with a minimum of $100 and a maximum of $2,500.

• Write down the date of death and count 36 months forward, then put that date in your calendar.
• Make sure the first T3 return designates the estate as a GRE and uses the deceased's Social Insurance Number.
• Note the deemed year-end that will arise when GRE status ends.
• Ask whether distributing income to beneficiaries before the 36 months end makes sense for the estate, given the tax position of each beneficiary.
• Ask an accountant whether any trust in the will could qualify as a QDT.
• Talk to a lawyer if the estate is likely to run past 36 months because of a dispute or a delay.

Frequently asked questions