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Taxation of an Estate as a Trust

Upon the death of a taxpayer, a T3 trust tax return is prepared, as well as a report of the income earned by the estate after the taxpayer’s death and before the distribution of the estate to beneficiaries are to be submitted.

An estate cannot allocate its capital gains to its non-resident beneficiaries. Instead, they are to be taxed within the trust. In view of this, if the estate is immediately distributable, the estate could calculate its income, allocate all of the income to the beneficiaries (by issuing a T3 supplementary slip), take a deduction from its income of the amounts so allocated, and in the end file a return showing that there is no taxable income.

It seems that the personal representative is required to file a return for income of the estate as a trust in situations where the trust generates income (ITA, s. 150(3); Income Tax Regulations, s. 204(1)). The administrative policy of the CRA is not to insist on the trust to file a return in circumstances when:

    • 1) Its total taxable income does not exceed $500;


    • 2) No beneficiary’s share in that taxable income exceeds $100;


    • 3) All of the taxable income is in the hands of the beneficiaries: and


    • 4) There are no non-resident beneficiaries.


    • The following information is given in the T3 Guide:


    “A trust return may not be required if the estate is distributed immediately after the person dies…”

Should that be the situation, the trustee would give each beneficiary a statement indicating his or her share of the estate.

There are opportunities for tax planning, even in an immediately distributable estate requiring a trust return, derived from the following principles:

    • 1)

Testamentary trusts

    • are taxed at graduated rates, while

inter vivos trusts

    • are taxed at the top marginal rate;


    • 2) a trust beneficiary is deemed not to have received income from a trust until the last day of the fiscal period of the trust, even though the income might have been paid to him or her in a previous calendar year;


    • 3)

testamentary trusts

    • can choose the length of their own first fiscal period.

Inter vivos trusts

    • have to operate on a calendar year basis; and


    4) Trustees can elect to have income taxed at the trust level, even if the income was paid to the beneficiaries and the trust would otherwise allocate the income to the beneficiaries.

The residence status of a trustee or beneficiary is very important, and often confusing, when dealing with the taxation of trusts. A trust is taxed, generally speaking, on the basis of its residence, which is usually determined in turn by the residence of the trustee. If a deceased Canadian resident had a sole beneficiary and estate trustee resident in the United States, it would be necessary to file a T1 terminal return, but not a T3 return. The exception is in regard to “taxable Canadian property”. Similarly, a personal representative has to be careful in determining whether the trust income in question is allocable to the beneficiary or has to be taxed in the trust, and if it is allocable, should remit withholding tax on the amount allocated to the non-resident beneficiary.

Don’t do anything before fully understanding your rights and obligations.  Contact the lawyers at Levy Zavet PC (Levy Zavet) in Toronto, Ontario for all of your tax law, estate planning and estate administration needs.