CRA—T3 Trust & Estate Returns

BusinessDictionary.com defines a trust as a: “Legal entity created by a party (the settlor) through which a second party (the trustee) holds the right to manage the settlors’ assets or property for the benefit of a third party (the beneficiary).”

There are many categories and subcategories of trusts. We’ll focus on four for our purposes:

  1. Living/Inter Vivos: trust created by the settlor while he or she is alive.
  2. Testamentary: trust established through a will and which comes into effect (is created) when the settlor (testator) dies.
  3. Revocable: trust that can be modified or terminated by the settlor after its creation.
  4. Irrevocable: trust that cannot be modified or terminated by the settlor after its creation.

T3 Filing Obligations: Trusts

Generally, a trust must file a T3 trust return:

  • When it is taxable in Canada
  • When it has received a request to file
  • If the trust received any income or capital gains during the year, and the settlor still has some control over the trust’s property
  • If a distribution was made to any beneficiaries

Trusts must prepare and provide T3 slips to its beneficiaries if it has allocated income to them during the year.

Trusts must file with the CRA T3 Trust returns and T3 slips that have been issued to the beneficiaries.

Deadlines

A Trust return must be filed within 3 months of its year end. In most cases a Trust’s year end will be December 31, however certain testamentary trusts, such as Graduated Rate Estate’s, may have a non-calendar year end.

Penalties

There are various penalties for late filing, failure to file, and providing false or misleading information.

Death and Taxes

There are several tax returns that may be filed as a result of the death of an individual:

  1. A final ‘Date of Death’ T1 individual tax return is prepared for all income received between January 1 and the date of death. At death, a taxpayer is ‘deemed’ to have disposed of all property at fair market value, subject to certain exceptions (such as gains on their principal residence or property that has been left to a spouse by will and is eligible for the spousal rollover provisions). For example, the full value of the testator’s remaining RRSP or RRIF is included in this return as income.

    This return is due:

    • For deaths occurring between January 1 and October 31: April 30 of the following year
    • For deaths occurring between November 1 and December 31: six months after the date the death occurred
  2. A “Rights and Things” individual tax return is an elective return that can be filed to report income earned but not received at the date of passing. This can include bonuses, dividends, Canada Pension Plan payments, Old Age Security payments, and other investment income. This return allows a second set of marginal tax rates for those sources of income, which can result in less tax owing than if the income had been included in the date of death T1.
  3. Estate returns are necessary when there is property retained in an estate after the date of death and prior to final distribution to beneficiaries, or in a testamentary trust, set up under the will, which earns income. Although testamentary trusts are separate entities from the estate, the T3 return filed is the same.

The executor can elect that the estate be a “Graduated Rate Estate” (GRE) for the three years following death so that income earned in the estate may be taxed at the individual annual marginal rates rather than the top marginal rate. It can often take some time to deal with and distribute a testator’s property and it may be impractical to allocate the estate’s income out to its beneficiaries in advance of the distribution of the property.

Graduated Rate Estates can have a non-calendar year end ending within 365 days of the testator’s death.

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