Who Pays Tax on Income Earned by an Estate After Death in Ontario?

The deceased's final tax return stops at the date of death. But an estate often keeps earning money for months or longer: interest on bank accounts, rent from a property, dividends from investments. If you are a beneficiary, or the person administering the estate, you may wonder who has to report that income.

The short answer is that it depends on whether the estate keeps the income or pays it out, and on what kind of estate it is. This article explains how that works in Ontario, and what a graduated rate estate is.

The final return and the estate are separate taxpayers

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. Income earned after death is not part of that return. Growth in the value of a property after death is also the estate's gain, not the deceased's.

An estate is generally required to file a T3 Trust Income Tax and Information Return if it realizes any gain or receives any payments after the death. The estate is treated like a separate taxpayer with its own return.

Is the income taxed in the estate or to the beneficiary?

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

A T3 return is also required when, among other conditions, the estate has tax payable, has disposed of capital property, or allocates income to beneficiaries and has total income from all sources of more than $500. If you receive money from an estate, ask whether any of it is income that must appear on your return.

What is a graduated rate estate?

Under the Income Tax Act, 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, it must show the deceased's SIN on its returns, and it must designate itself as the graduated rate estate in its first T3 return. Only one estate can make that designation for the same individual.

The benefit is the tax rate. 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.

• Graduated rates apply only while the estate qualifies, which is no longer than 36 months after the death.
• For 2026, the federal rate starts at 14% on taxable income up to $58,523 and rises to 33% above $258,482.
• Ontario rates apply in addition, starting at 5.05% on taxable income up to $53,891. Ontario income tax also includes a surtax and the Ontario Health Premium, so simple combined-rate estimates can understate the tax.

Tax brackets are indexed each year, so use the rates for the year in question rather than relying on an old example.

T3 deadlines and the estate's year-end

The T3 return and any balance owing are due no later than 90 days after the estate's tax year-end. A graduated rate estate can choose a non-calendar year-end, up to one year after the date of death. It 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 is wound up, its tax year ends on the date of the final distribution of assets. The final T3 return and any balance owing are due no later than 90 days after that date.

Late filing can be costly. Which late-filing penalty applies to a particular return depends on the circumstances, so it is worth confirming with an accountant or lawyer. CRA describes a T3 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.

What to do next

• Keep a record of every payment the estate receives after the date of death, with dates and amounts.
• Ask whether the estate qualifies as a graduated rate estate and whether it was designated on the first T3 return.
• Decide with an accountant whether to keep income in the estate or allocate it to beneficiaries, since that choice affects who pays the tax.
• Note the estate's year-end and the 90-day T3 deadline.
• Before distributing property, remember the representative needs a clearance certificate from CRA.

Whether to keep or allocate income can have different results depending on the beneficiaries' own incomes and the estate's circumstances. A lawyer or accountant can look at your numbers and confirm the best way to report them.

Frequently asked questions