T3 Slips for Ontario Estate Beneficiaries: Taxes on Estate Income

A T3 slip arriving in your name after a death can be confusing, especially if you have already received your inheritance. It does not usually mean you did something wrong.

This article explains in plain terms why an estate issues a T3 slip, how estate income reaches beneficiaries, and what the term graduated rate estate means.

Why you received a T3 slip

After someone dies, their estate keeps existing for tax purposes until the assets are fully distributed. During that time the estate may earn income from investments, rental property or other sources.

An estate or trust uses the T3 slip, called the Statement of Trust Income Allocations and Designations, to report income it allocates to beneficiaries. In most cases the allocated amounts are included in the beneficiary's income and deducted from the trust's income. How this applies to your own return depends on your situation, so it is worth confirming with an accountant.

The inheritance itself versus estate income

A T3 slip is about income the estate earned, not the inheritance itself. The CRA lists most gifts and inheritances among the amounts that are not reported or taxed. So you might receive a large inheritance with no tax on it, and still get a small T3 slip for interest the estate earned while it was being administered.

Capital gains from the deceased's property at death are a separate matter. A deceased person is considered to have sold all their property just before death, and any capital gain or loss is reported on the deceased's final return, not by the beneficiary. Property transferred to a surviving spouse or common-law partner who is resident in Canada at the time of death can avoid a gain or loss on the final return, and it generally must vest in that person within 36 months of death.

The final return has its own deadline. For a death between January 1 and October 31, it is due April 30 of the following year. For a death between November 1 and December 31, it is due 6 months after the death. If the deceased, or their spouse or common-law partner, was carrying on a business, the final return is due June 15 of the year after death (for deaths January 1 to December 15).

Ontario's Estate Administration Tax is a different charge again. It is paid by the estate, not by the beneficiaries or the estate representative.

Residents and non-residents

If a beneficiary lives outside Canada, the rules differ. Estate income paid or payable to non-resident beneficiaries is reported on an NR4 slip, not a T3 slip. If you live abroad and expect estate income, ask the estate trustee which slip applies and speak with an accountant about how it is treated where you live.

What is a graduated rate estate?

The estate that arises on an individual's death can be a graduated rate estate (GRE) for up to 36 months after the death. To qualify, it must be a testamentary trust, include the deceased's SIN on its T3 returns, and designate itself as the GRE. Only one estate can be the GRE for an individual.

This matters mainly to the estate trustee, but it can affect you too. One way it matters is for charitable gifts made by the will. A donation by a GRE can be carried back to the deceased's final return if the gift is made within 60 months after death. The estate must meet the GRE requirements except the 36-month limit, and the donated property must have been acquired on and as a consequence of the death.

Whether an estate qualifies, and whether it is worth keeping the estate open for tax reasons, depends on the facts and is worth confirming with an accountant.

Why the estate may stay open for a while

Estate trustees carry out the wishes set out in the will. Their duties include winding up the deceased's affairs and paying taxes, bills and other debts, and the estate is then distributed according to the will. Estates are still presumed to be wrapped up within one year of death, often called the executor's year. When an estate is not simple, the court accepts that expecting administration to finish within that year may be unreasonable.

Trustees often keep some money back until the tax side is settled. A legal representative who distributes assets before getting a CRA clearance certificate (Form TX19) is personally liable for unpaid amounts, up to the value of the assets distributed. While an estate stays open, it may keep earning income, which can lead to a T3 slip for you.

Timing and what to do with your slip

A T3 return is due 90 days after the trust's tax year-end. If the trust ceases to exist, the 90 days run from the date of the final distribution of its assets. When you can expect your own slip depends on the estate's situation, so it is worth asking the estate trustee or an accountant.

• Keep the T3 slip with your tax records and report it as the slip directs, or give it to your tax preparer.
• Ask the estate trustee what the income was and why it was allocated to you.
• Tell your accountant if you also received a lump sum from the estate, so the two are not confused.
• If the slip seems wrong or you did not expect one, ask the estate trustee for an explanation in writing.
• Consider legal advice if you are unsure the estate is being administered properly.

Frequently asked questions