What Is a T3 Trust Return and Does an Estate Need One in Ontario?

If you are the estate trustee and the estate stays open for more than a few months, money may start to come in: interest, dividends, rent, or a gain on a sold house. That income belongs to the estate, not to the person who died, and it is reported on a different return.

That return is the T3 Trust Income Tax and Information Return. This article explains when an estate needs one, who pays the tax, how the estate's year-end works and when the filing is due.

The final return and the T3 are two different returns

A final T1 Income Tax and Benefit Return must be filed for every person who dies. It reports income and property gains up to the date of death. What happens after death is a separate question.

If the estate sells the home or other property after death, the gain is reported on line 1 of a T3 return. It is generally the sale price minus the fair market value reported on the final return, plus any disposition costs, so growth after death is the estate's gain, not the deceased's.

When an estate needs a T3 return

A T3 return is generally filed for the estate if it realizes any gain or receives any payments after the death. Some amounts, such as the CPP/QPP death benefit, may instead be reported by a beneficiary.

The T3 Trust Guide lists several triggers. A return is required when, among other conditions, the trust has tax payable, has disposed of or is deemed to have disposed of capital property, or allocates income to beneficiaries and has total income from all sources of more than $500.

A return may not be needed if the estate was distributed right after the death and earned no income before then. If you are unsure which side of the line your estate falls on, confirm it with a lawyer or accountant.

Who pays the tax on income earned after death

Amounts the estate allocates to beneficiaries are deducted from the trust's income and generally included in the beneficiaries' income. They are reported on T3 slips with a T3 Summary. Income the estate keeps is taxed in the estate.

The rate depends on the type of estate. 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. It must be a testamentary trust, show the deceased's SIN on its returns, and designate itself as the graduated rate estate in its first T3 return. Only one estate can make that designation for the same individual.

Since the 2016 tax year, a graduated rate estate is taxed at graduated rates. Other trusts created by will, and estates that are no longer graduated rate estates, generally pay the flat top federal rate. Qualified disability trusts also keep graduated rates.

Year-end and filing deadline

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

The late-filing penalty is 5% of any balance owing, plus 1% of the balance for each full month the return is late, up to 12 months. CRA also charges compound daily interest on unpaid amounts from the day after the due date until the balance is paid. CRA also has an alternative late-filing penalty of $25 a day for each day the return is late, with a minimum of $100 and a maximum of $2,500. Which penalty applies to your estate, and how interest applies, depends on the facts, so it is worth confirming with a lawyer or accountant.

What to do next

• Keep a record of every payment the estate receives after the date of death.
• Note any sale of estate property and the fair market value used on the final return.
• Decide with your advisor whether the estate will be a graduated rate estate and choose a year-end.
• Diarize the T3 due date: 90 days after the year-end.
• Before you distribute property, get a clearance certificate from the Minister, which confirms that all tax amounts have been paid or that security has been accepted; a representative who distributes without one is personally liable for unpaid amounts up to the value distributed.
• A clearance certificate generally cannot be obtained if the estate does not have enough assets to pay all the tax, interest and penalties owed to CRA.

A lawyer or accountant can confirm whether your estate needs a T3 return and help you choose a year-end.

Frequently asked questions