Graduated Rate Estate in Alberta: How Estate Income Is Taxed

As an executor, you may have noticed that an estate keeps earning money after the person has died. Interest builds up, investments pay dividends, and rent may keep coming in. You are probably wondering how that income is taxed and whether the estate gets any tax break.

The term you are likely to hear is graduated rate estate. This article explains what it means, how long it lasts, and how it fits with the other tax returns an estate may need. Some of these points work the same way for every estate, while others depend on the facts. How Alberta's own income tax applies to the estate's income depends on the facts, so confirm it with an accountant or lawyer.

This article covers the law of Alberta.

What a graduated rate estate is

A graduated rate estate, often shortened to GRE, is an estate that is taxed at graduated rates, the same way an individual is taxed. In plain words, the estate's income is not all taxed at one flat top rate. It is taxed in steps, as a person's income would be.

The status is not permanent. An estate can only be a graduated rate estate for up to 36 months after the date of death. After that, it is treated differently for tax purposes, so the timeline matters if administration is likely to take a long time.

This article does not set out the specific rates or brackets. They change over time, and the Alberta portion depends on the facts, so ask an accountant or lawyer to confirm the current figures for your situation.

The 36-month window

The status can last for up to 36 months after death. If the estate is still open after that point, it can no longer use graduated rates.

• Keep a clear record of the date of death, because every deadline is measured from it.
• Ask whether the estate can be wound up and distributed inside the 36 months.
• If administration will run longer, speak with an accountant early about how the estate will be taxed once the status ends.
• Do not assume that a delay in distributing assets pauses the 36-month clock.

How income earned after death is taxed

Income earned after death is taxed to the designated beneficiaries or the estate when it is received. Beneficiaries are generally taxed only on amounts paid to them that the estate deducts. So whether the tax lands on the estate or on a beneficiary depends on what was paid out and what the estate deducted.

If the estate sells property after the date of death, the estate reports those sales on a T3 return. A beneficiary who later sells property they received reports that sale on their own T1 return, using the fair market value shown on the final return as their starting cost.

What is taxed on the final return instead

Some of the largest tax amounts are not part of the estate's later income at all. They belong on the deceased's final T1 return, which the legal representative files.

There are exceptions. Property passing to a spouse or common-law partner who was a resident of Canada at death can roll over at its adjusted cost base instead of fair market value, but only if the property is locked in for them no later than 36 months after the date of death. The legal representative can also elect out of that rollover property by property. An RRSP may also avoid the deemed receipt where a spouse or common-law partner is the sole designated beneficiary and the property is transferred to a qualifying plan by December 31 of the year after death.

Returns and deadlines to watch

Besides the final T1 return, the estate may also need to file a T3 trust return. It is due 90 days after the trust's tax year-end (or the date of final distribution if the trust ceases to exist). A late T3 may attract a penalty of $25 a day, with a minimum of $100 and a maximum of $2,500, even if nothing is owing.

An optional return for income from a graduated rate estate is due on the same date as the final return. In general, the final return is due April 30 of the following year if the person died between January 1 and October 31, or six months after death if the person died between November 1 and December 31. Other dates apply in some cases, such as when the deceased or a spouse carried on a business.

What to do next

• Write down the date of death and mark 36 months from that date on your calendar.
• List every asset and the income it produces after death, such as interest, dividends and rent.
• Keep records of what the estate pays out to beneficiaries and when.
• Ask an accountant whether the estate needs a T3 return and when it is due.
• File the final return and any optional returns on time, because late-filing penalties and daily compounded interest can apply.
• Request a clearance certificate only after returns are filed and assessed and taxes are paid or secured, using Form TX19.
• Do not distribute property before you have a clearance certificate, since you can be personally liable up to the value of what you distributed.

Because the graduated rate status, the Alberta tax calculation and the timing of distributions all depend on the facts, a lawyer or accountant can confirm how they apply to the estate you are administering.

Frequently asked questions