How Are Trusts Taxed in Ontario? T3 Returns and Trust Tax Rates

If you are a trustee, or a beneficiary who has received a T3 slip, you may be wondering who actually pays the tax on a trust's income and whether a return is required each year. The answers depend on the kind of trust and what it did during the year.

This article walks through the basics in plain language: who pays, which rate applies, when a T3 is needed, what is due and when, and what happens if a deadline is missed. Because trust tax is detailed, an accountant or lawyer should confirm how it applies to your trust.

Who pays the tax: the trust or the beneficiary?

A trust can deduct income that becomes payable to a beneficiary in the year, and the beneficiary then includes that amount in their own income. The result is that the beneficiary pays tax on income paid or payable to them, and the trust pays tax on income it retains.

Income allocated to beneficiaries is included in their income and deducted from the trust's income. Designations can let the character of some income, such as dividends that qualify for the dividend tax credit, flow through to beneficiaries, and this is reported on T3 slips.

What rate does a trust pay?

Tax on a trust, other than a graduated rate estate or a qualified disability trust, is the highest individual percentage rate for the year multiplied by the trust's taxable amount. That means ordinary trusts get no graduated brackets. The actual percentage changes with the year and the province, so check the current rates with the CRA or an accountant.

There are two exceptions. A graduated rate estate is taxed at the same graduated rates as individuals while it qualifies. A qualified disability trust is elected on Form T3QDT and is also taxed at graduated rates.

Because a trust keeps paying at the top rate on income it holds back, trustees often look at whether income can properly be paid or made payable to beneficiaries, who may be in a lower bracket. Whether that is possible depends on the trust document and the trustee's duties, so get advice first.

When must a trust file a T3?

A resident express trust that is not a listed trust must file a T3 return every year, even if it had no income. Other trusts, including listed trusts, must file for a year in which one of the following happens.

• The trust has tax payable, is asked by the CRA to file, or is deemed resident.
• The trust disposes of capital property or has a taxable capital gain.
• The trust holds property under section 75(2) of the Income Tax Act.
• The trust gives a beneficiary a benefit of more than $100 for upkeep, maintenance or taxes on property the beneficiary uses.

A trust that allocates income to beneficiaries must also file if its total income is more than $500, if more than $100 is allocated to a single beneficiary, if it distributes capital to a beneficiary, or if it allocates income to a non-resident beneficiary.

Deadlines, Schedule 15 and penalties

A T3 return and any balance owing are due no later than 90 days after the trust's tax year-end.

Most trusts that file a T3 must include Schedule 15, which gives beneficial ownership information about each reportable entity: trustees, settlors, beneficiaries and controlling persons. The enhanced rules apply to taxation years ending on or after December 31, 2023, and listed trusts are generally exempt.

Small trusts and bare trusts

A trust is a listed trust if its assets have a total fair market value not exceeding $50,000 throughout the year. A trust can also qualify with up to $250,000 in specified assets if every trustee is an individual and every beneficiary is an individual related to each trustee. A listed trust generally does not need to file a T3 with Schedule 15 unless another filing condition applies or the CRA asks.

A reportable bare trust is an express trust where the legal owner can reasonably be considered to act as an agent for the beneficiaries. Bare trusts are not required to file a T3, including Schedule 15, for taxation years ending on or after December 31, 2024 and before December 31, 2026, but certain bare trusts may have to file for later years. Where a reportable bare trust does file, the rest of the T3 can generally be left blank apart from Schedule 15, and the income is reported on the beneficial owner's own return.

Bare trust reporting has been changing, so confirm the current position before relying on it.

What to do next

• Confirm what kind of trust you have and the date its tax year ends.
• Calendar the date 90 days after year-end so the return and any tax owing are not late.
• Gather statements showing income, capital gains and any payments to beneficiaries.
• Check whether the trust qualifies as a listed trust or a bare trust.
• Ask an accountant to prepare the T3 and Schedule 15, and a lawyer if you are unsure about trustee duties.

Frequently asked questions