Estate planning is a lifelong exercise. The owners of the estate build and manage its assets and enjoy the estate’s benefits during their lifetimes. But what happens after they are gone? They have a confidant they trust with their estate, discuss plans to expand and preserve it, and ensure their loved ones benefit from their efforts. This confidant becomes the executor of their estate, who operates on their behalf.
The executor has a lot of administrative, legal, accounting, and tax work on their plate after the estate owner’s death. From gathering all the estate and using it to pay the deceased’s debts to filing final income tax returns, closing all bank accounts, and distributing the remaining estate to the beneficiaries, the executor has to do it all. Another essential duty is to report all transactions meticulously.
What are Estate Returns?
Liquidating and distributing the estate takes time. During this time, the estate continues to earn returns. Now, the returns the estate earned up to the day the owner died are filed under the owner’s income tax returns. After the estate owner’s death, the estate becomes a separate legal entity for tax purposes until it is transferred to the new beneficiary.
An estate can take the form of shares, bonds, ETFs, and other investment securities; real estate; one’s own business; jewelry; antiques; and more. These assets can generate investment income, including interest, dividends, capital gains from the sale of assets, rent, and business income.
The executor must report the estate returns earned during this gap separately on the T3 Trust Income Tax and Information Return. If the estate return is something you can report in the income tax returns of the deceased, such as the Canada Pension Plan death benefit, you need not file a T3.
How Taxes Work for Estate Returns
Trusts are separate legal entities and are subject to a flat 33% federal tax rate plus provincial tax. It is the highest marginal tax rate applied to individuals. However, executors can designate the estate of the deceased as a “graduated rate estate” for tax purposes in its first T3 return.
The graduated rate estate (GRE) is a tax benefit offered by the CRA to eligible estates, under which the estate is taxed in the same tax brackets as an individual. Like an individual, the estate can use charitable donations and the first-year capital loss to reduce taxes. The GRE benefit is available for up to 36 months from the death of the estate owner.
Tax Filing for Estate Returns
When filing a T3 return for the first time, you will need a Trust Account Number to file online. You have to designate the trust as a “graduated rate estate” and file it within 90 days from the end of the tax year.
To file T3, you, as the executor, need to collect documents such as the trust deed, financial statements, supporting schedules, and three tax forms:
- T3 Trust Income Tax and Information Form
- Summary of Trust Income Allocations and Designations
- T3 slip (Statement of Trust Income Allocations and Designations).
If you do not have all the information slips to file the returns, you can fill in the estimated income and file the returns to avoid a late filing penalty of 5% of the tax due plus 1% for every month of delay. Even if there is $0 tax, a $ 25-per-day late-filing penalty will apply. Once you receive the remaining information slips, you can file for reassessment if there are gaps between the estimated and actual amounts.
You have the flexibility to select the tax year date in the first return, but then you must follow that tax year for subsequent filings. Hence, choose the date wisely, considering the timing of all information slips.
Many may decide to retain the asset in the trust and allocate income and returns to beneficiaries. In such a scenario, trusts must file T3 returns to report any income above $500 earned by the estate. The T3 return should also state details of income of more than $100 allocated to a single beneficiary, capital allocated to beneficiaries, and income allocated to a non-resident beneficiary. Trusts issue T3 slips to beneficiaries, who use them to report trust income on their income tax returns.
T3 returns can be confusing, depending on the estate’s complexity. The variety of assets in the estate and the calculations of their returns require professional eyes. Being an executor brings significant responsibility. Seeking professional help can ease your burden as an executor.
Contact Glenn Graydon Wright LLP in Oakville to Help You with Estate Returns
Talk to a professional accountant to help you collect all the necessary information needed to file estate returns and prepare trust financial statements. At Glenn Graydon Wright LLP, our accountants and bookkeepers can provide services including tax filing and financial reporting for all trust activities. To learn more about how Glenn Graydon Wright LLP can provide you with the best accounting and estate planning expertise, contact us at 905-845-6633 or connect with us online to schedule an initial consultation.