Graduated Rate Estate Status: What It Means for Ontario Estates

When someone dies, their estate may keep earning income for months or years while the trustee settles affairs. How that income is taxed can depend on whether the estate has graduated rate estate status.

This article explains what the status is, the conditions to qualify, how it affects tax rates and timing, and what to do about it as a trustee. Because the tax result depends on the estate's facts, an accountant or lawyer can confirm how it applies to yours.

What a graduated rate estate is

Under the Income Tax Act, s. 248(1), a graduated rate estate is the estate that arose on and as a consequence of an individual's death, for up to 36 months after the death. In plain words, it is the main estate created by the death, treated for a limited time as eligible for lower graduated tax rates.

Not every trust created by a will qualifies. Other trusts created by will, and estates that are no longer graduated rate estates, generally pay the flat top federal rate.

Conditions to qualify

The estate has to meet these conditions:

• it arose on and as a consequence of the individual's death
• it is a testamentary trust
• it shows the deceased's SIN on its returns
• it designates itself as the graduated rate estate in its first T3 return
• only one estate makes that designation for the same individual

The designation is made on the first T3 return, so it should be part of the planning when the return is prepared.

How the tax rates differ

Since the 2016 tax year, a graduated rate estate is taxed at graduated rates. Qualified disability trusts also keep graduated rates. The 2026 federal rates start at 14% on taxable income up to $58,523 and reach 33% above $258,482. Ontario's 2026 rates run from 5.05% on taxable income up to $53,891 to 13.16% above $220,000.

Ontario tax also includes items that are not in the bracket table, so the real combined rate is higher than the table alone suggests. An accountant can work out the actual figures.

Timing, year-ends and losses

A graduated rate estate can choose a non-calendar year-end, up to one year after the date of death. It has a deemed year-end when it stops being a graduated rate estate, which is no later than 36 months after the death. The T3 return and any balance owing are due no later than 90 days after the trust's tax year-end.

There is also a loss election. Under ITA s. 164(6), the legal representative can elect to treat certain capital losses and terminal losses of a graduated rate estate as losses of the deceased for the final tax year. CRA describes the current window as the estate's first tax year. A proposed change would extend this to the estate's first three tax years for deaths on or after August 12, 2024, but that change is proposed, not enacted.

What to do next

• Confirm the estate arose from the death and is a testamentary trust.
• Make sure the deceased's SIN will appear on the estate's returns.
• Ask your accountant to designate the estate as a graduated rate estate in its first T3 return.
• Choose the estate's year-end with the 90-day filing deadline in mind.
• Keep track of the 36-month limit so you are ready when the status ends.

Frequently asked questions