- A testamentary trust is one that arose on and as a consequence of a death, and most pay tax at the highest individual rate unless an exception applies.
- A trust can deduct income that is paid or payable to a beneficiary, and the beneficiary then reports that income.
- The T3 return and any balance owing are generally due within 90 days after the trust's year-end.
If someone left property in a trust under their will, you may be the trustee, a beneficiary, or both. Either way, the trust is a separate taxpayer. It can have its own tax return, its own tax rate and its own deadlines, and mistakes can be costly for the people the trust is meant to help.
This article walks through the main federal tax rules for a trust created by a will, as they apply to Albertans. Tax rules for trusts change and vary by trust type, so use this as a map for your questions to a lawyer or accountant rather than a substitute for that advice.
This article covers the law of Alberta.
What counts as a testamentary trust
Federal tax law defines a testamentary trust as a trust that arose on and as a consequence of the death of an individual. An inter vivos trust is any trust that is not a testamentary trust. The CRA describes a testamentary trust as one generally created on and as a result of a person's death, such as under a will or court order, while a trust created by a living person is generally excluded.
There is one important exception. A testamentary trust can be treated as an inter vivos trust for tax purposes if it incurs certain debts owed to non-arm's-length parties, although some debts are excluded. If the trust borrows from, or owes money to, a family member or related business, ask an accountant whether this applies before the debt is taken on.
Who pays the tax: the trust or the beneficiary
A trust may deduct income that became payable in the year to a beneficiary, and the beneficiary includes that amount in their own income. In effect, income can be taxed in the hands of the person who receives it rather than in the trust.
"Payable" has a specific meaning. An amount is payable only if it was actually paid in the year or the beneficiary had a right to enforce payment. Simply deciding in your head that income belongs to a beneficiary is not enough, so keep clear records of what was paid and when.
The tax rate: top rate, with two exceptions
A trust other than a graduated rate estate or a qualified disability trust pays tax at the highest individual percentage on its taxable amount. That is why leaving income inside a trust can be costly compared with paying it out to beneficiaries who are in lower brackets. The current percentage is published by the CRA, so check it for the year in question.
| Type | How it is taxed |
|---|---|
| Graduated rate estate | Graduated individual rates for up to 36 months after death |
| Qualified disability trust | Not subject to the highest individual percentage that applies to other trusts; this is a testamentary trust, elected on Form T3QDT, whose electing beneficiary qualifies for the disability tax credit, and how its tax is calculated is worth confirming with an accountant |
| Other trusts | Highest individual percentage on the taxable amount |
T3 returns and deadlines
The T3 return is due no later than 90 days after the trust's tax year-end, and any balance owing is due within the same 90 days. A graduated rate estate can choose a non-calendar year-end, and its final year ends on final distribution.
Check the CRA's current T3 instructions each year. How the deadline applies to your trust, especially if its year-end is not the calendar year-end, depends on the facts and is worth confirming with a lawyer or accountant.
Spousal trusts, the rollover and the 21-year rule
A spousal trust rollover under section 70(6) of the Income Tax Act applies to property passing on death to a spouse or common-law partner, or to a trust created by a will. The spouse must be entitled to all trust income arising before their death, and no one else may receive or use the trust's income or capital before then. The deceased is then deemed to dispose of the property at its adjusted cost base rather than fair market value.
The rollover has conditions. The property must be shown to have vested indefeasibly in the spouse or trust within 36 months after death, or a longer period the Minister considers reasonable on written request, and the spouse or the trust must be resident in Canada.
- A spousal or common-law partner trust must pay the surviving spouse or partner all income during their lifetime, and that person must be the only one who can receive its income or capital while alive.
- A common-law partner is someone who has cohabited in a conjugal relationship for a 12-month period.
- For a spousal trust, the deemed disposition of capital property at fair market value occurs on the death of the spouse or common-law partner.
- Other trusts face a deemed disposition 21 years after creation.
Rollover and 21-year rules vary by trust type, so a spousal trust, an alter ego trust and a joint partner trust are not all treated the same. Get tax advice before relying on any one of them.
The Trustee Act and what to do next
Tax is only one side of running a trust. Alberta's Trustee Act, SA 2022, c T-8.1, replaced the former Act and was proclaimed in force on February 1, 2023. It requires a trustee to act in good faith and in accordance with the terms of the trust, the best interests of the objects of the trust, and the Act.
- Get a copy of the will and confirm exactly what trust it creates.
- Note the date of death and the trust's year-end, and calendar the 90-day T3 deadline.
- Keep a record of all income and of what was paid to beneficiaries, and when.
- Check whether the trust owes any debts to related parties.
- If a spouse or partner is a beneficiary, ask about the rollover conditions and the 36-month vesting period.
- Check the CRA's current T3 guidance each year and speak with a lawyer or accountant about your situation.
Frequently asked questions
Is a testamentary trust taxed at lower rates than other trusts?
Usually not. A trust other than a graduated rate estate or qualified disability trust pays tax at the highest individual percentage on its taxable amount. A graduated rate estate is taxed at graduated individual rates for up to 36 months after death.
When is the T3 return due?
No later than 90 days after the trust's tax year-end, and any balance owing is due in the same 90 days. Check the CRA's current guidance each year.
Can a testamentary trust be treated as an inter vivos trust?
Yes, in one case. It can be treated as an inter vivos trust for tax purposes if it incurs certain debts owed to non-arm's-length parties, though some debts are excluded.
What is the 21-year rule?
Under the Income Tax Act, trusts other than spousal trusts face a deemed disposition of capital property 21 years after creation, while for a spousal trust the deemed disposition happens on the death of the spouse or common-law partner instead. The rollover and 21-year rules vary by trust type, including alter ego and joint partner trusts. How they apply to your trust depends on its terms, so it is worth confirming with a lawyer or accountant.
Sources
- Income Tax Act, s. 108(1) (Justice Laws) — Justice Laws (federal)
- CRA – Trust types and codes — canada.ca
- CRA – When to file a trust's T3 return — canada.ca
- Trustee Act, SA 2022, c T-8.1, ss. 104-105 (King's Printer) — kings-printer.alberta.ca
- Income Tax Act, s. 70(6) — Justice Laws (federal)
- Income Tax Act, s. 104(4) — Justice Laws (federal)
- Income Tax Act, s. 122(1); CRA trust types — Justice Laws (federal)
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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