CHAPTER 8

PERSONAL TAX RETURNS DUE ON DEATH

Learning Objectives ................................................................................................................ 8-3

8.1 Introduction to the Canadian Income Tax System .................................................. 8-5
8.1.1 Tax System Based on Residency Not Citizenship........................................................ 8-5
8.1.2 No Inheritance or Gift Tax – Canada Taxes on “Disposition”........................................ 8-5
8.1.3 Non-resident Withholding Taxes ...................................................................................8-5
8.1.4 Federal and Provincial Taxation and Collection ............................................................8-6
8.1.4.1 Federal Taxation ........................................................................................8-6
8.1.4.2 Common Law Only: Provincial Taxation .....................................................8-6
8.1.4.3 Quebec Only: Provincial Taxation ..............................................................8-6
8.1.5 Overview of the Income Tax Act ...................................................................................8-6
8.1.6 Other Sources of Tax Law ............................................................................................8-8
8.1.7 Government Publications .............................................................................................8-8
8.1.8 Tax Return Preparation Guides ....................................................................................8-8
8.1.8.1 CRA Guides ...............................................................................................8-8
8.1.8.2 Quebec Only: Provincial Guides .................................................................8-9
8.1.8.3 Special Topic Guides .................................................................................8-9
8.2 Introduction to T1 and T3 Tax Returns .....................................................................8-9
8.2.1 Definitions ..................................................................................................................8-10
8.2.2 T1 General Income Tax Return for Individuals ............................................................8-12
8.2.2.1 Marginal Tax Rates ..................................................................................8-13
8.2.3 T3 Trust Income Tax and Information Return .............................................................8-14
8.3 Final Tax Returns for the Deceased ........................................................................8-16
8.3.1 T1 Terminal Return ....................................................................................................8-16
8.3.1.1 Deductions and Non-refundable Tax Credits on the Terminal Return ...... 8-16
8.3.2 Exceptions to Deemed Disposition Rules on Death ....................................................8-17
8.3.2.1 Testamentary Spousal Trusts and the ACB of Trust Assets .....................8-17
8.3.2.2 Introduction to Taxation of RRSPs and RRIFs on Death ..........................8-18
8.3.2.3 Due Dates for Terminal Returns ...............................................................8-19
8.3.3 Optional Returns ........................................................................................................8-20
8.3.3.1 Rights and Things Return .........................................................................8-20
8.3.3.2 Returns for Income from a Testamentary Trust ........................................8-22
8.3.3.3 Returns for a Partner or Proprietor ...........................................................8-23
8.3.4 Prior Years’ Tax Returns ............................................................................................8-23
8.3.5 Foreign Tax Returns ...................................................................................................8-23
8.3.5.1 U.S. Estate Tax Return ............................................................................8-23
8.4 T3 Trust Returns.......................................................................................................8-24
8.4.1 Income Included on a T3 Return.................................................................................8-24
8.4.2 Deductions from Income Reported on a T3 Return .....................................................8-24
8.4.2.1 Exception for Estate T3 Return.................................................................8-25

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 Personal Tax Returns Due on Death

8.4.3 Calculation and Payment of Trust Taxes ................................................................... 8-25

8.4.3.1 Due Dates ............................................................................................... 8-26
8.4.3.2 Final Trust Return.................................................................................... 8-26
8.4.3.3 T3 Slips and Beneficiaries ....................................................................... 8-26
8.5 Distributions to Non-residents (NR Tax) ................................................................ 8-27
8.5.1 Taxation of Beneficiaries in Home Jurisdiction........................................................... 8-27
8.6 Assessment Notices and Objections ..................................................................... 8-27
8.7 Penalties and Interest Charges .............................................................................. 8-27
8.8 Tax Clearance Certificate ........................................................................................ 8-28
8.9 A Word on Spousal Trusts, Alter Ego Trusts, and Joint Partner Trusts.............. 8-29

Figure 8.1: Canadian Income Tax Act: Part I Outline ............................................................... 8-7
Figure 8.2: Marginal Tax Rates (Federal Taxes Only) – Example ......................................... 8-14

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 Chapter 8

Personal Tax Returns Due on Death

Learning Objectives

The taxation of individuals on death, trusts, and beneficiaries is an important component

of any estate or trust administration. Without a solid understanding of the rules,
opportunities to minimize tax to the estate, the trust, or a beneficiary may be missed.
Some tax rules can have serious ramifications to the estate, trust, or beneficiaries if
appropriate planning does not occur. The choice of investments can also trigger
unnecessary or undesirable tax consequences.
Executors and trustees often hire specialists to prepare the estate and trust returns.
Beneficiaries may hire specialists to prepare their personal returns. However, once a
critical date has passed, a decision is made, or a distribution paid, the opportunity to
avoid or minimize tax payable may be lost forever. Accordingly it is important to ensure
tax advice is obtained in advance. For complex estates, tax advisors will often be
retained at the beginning of the administration.
The executor and trustee must be alert to the nature of the applicable rules and
appreciate how and when the rules apply. This knowledge and understanding ensures
that the tax implications of decisions that will be made during an administration are not
overlooked and are taken into consideration before final decisions are made or actions
taken.
While the trust officer at a corporate trustee or the professional advisor to an executor or
trustee is not expected to be the tax specialist, he or she plays a critical role in ensuring
that the specialists have relevant information and are engaged before decisions are
made or time to act has run out. When administering an estate, it is this knowledge that
also helps the executor (or his or her advisors) know what questions to ask when
requesting information about the deceased’s assets and liabilities or what to look for
when reviewing personal papers and other information.
This Chapter introduces students to the nature of the Canadian income tax system and
provides a brief overview of the rules that apply upon the death of an individual, the
taxation of trusts, and the taxation of beneficiaries. The Estate and Trust Taxation
course (CETA 3) provides detailed review of these rules.
Upon completion of this Chapter, students will be able to:
• Summarize the general rules that apply to Canadian taxpayers as a result of
death
• Identify the income that must be reported on the deceased’s final tax return

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 Personal Tax Returns Due on Death

• Recognize the deductions and credits that may be claimed to reduce tax payable
• Identify additional returns that may be filed by the executor on behalf of the
estate
• State the due dates for each type of tax return
• Summarize the general rules that apply to the taxation of a trust or estate and its
beneficiaries
• Summarize the rules that apply to the late filing of tax returns and the late
payment of taxes
• Explain the purpose of notices of assessment and clearance certificates
• Distinguish Canada’s approach to taxation on death to jurisdictions with
inheritance tax systems
• Identify when non-resident withholding tax rules may apply to beneficiary
distributions from an estate or a trust
• Demonstrate learning by applying rules and concepts to a given scenario
Students who are unfamiliar with the Canadian income tax system are encouraged to
review the information found on the Understanding Tax page of
www.GetSmarterAboutMoney.ca.
The Canada Revenue Agency (CRA) also produces a wide range of information
materials. These include guides for preparation of tax returns by individuals, by
executors, and trustees. Much of the material that these guides address will be covered
in the Estate and Trust Taxation course (CETA 3).1 Those interested to learn more
today may wish to review these more general guides as well as topic-specific guides.
These guides address a wide range of topics, including capital gains, different types of
registered plans, disability, and charitable gifting.
Quebec Only: Revenue Quebec also provides information and guides.

REMINDER: Terminology varies significantly between provinces, and even more

so with Quebec. For ease of reading, as terminology is defined one word or phrase is
selected for purposes of the materials in this course. Jurisdiction-specific
terminology is only used if required. See the Generic Terms Cheat Sheet for the full
list of generic terminology.

1
This is the third course in the Certificate to Estate and Trust Administration program. Hereafter referred to as
CETA 3.

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 Personal Tax Returns Due on Death

8.1 INTRODUCTION TO THE CANADIAN INCOME TAX SYSTEM

Federal income tax law and tax policy are the responsibility of the Department of Finance.

8.1.1 Tax System Based on Residency Not Citizenship

Canadian residents, including individuals, trusts and corporations, are taxed in Canada on their
worldwide income. Worldwide income includes income from all sources whether located in
Canada or otherwise. The Canadian tax system is a system based on the taxpayer’s residence. By
comparison, the U.S. taxation system is based on citizenship. Under the U.S. system, all U.S.
citizens and Green Card holders, wherever resident in the world, are taxed in the U.S. on their
worldwide income and are subject to U.S. estate tax rules.

8.1.2 No Inheritance or Gift Tax – Canada Taxes on “Disposition”

Canada does not have an inheritance or gift tax system such as that found in the United States,
the United Kingdom, and other countries. These countries impose a tax on the value of assets
that pass on death, and on some lifetime gifts. In Canada, if a gift is made in the taxpayer’s
lifetime, or a Canadian taxpayer dies, there is a deemed disposition of the asset at the time of the
gift or on death, and tax is imposed on any accrued capital gains.

8.1.3 Non-resident Withholding Taxes

Many jurisdictions impose a “non-resident withholding tax” on income earned by non-residents.2
The rules apply to all types of income (e.g. bank interest, GICs, bonds, dividends, and capital
gains).3 The rules also apply to payments from an executor or trustee to beneficiaries. In Canada,
the default withholding rate is 25%. This rate is subject to treaties between Canada and the other
jurisdictions.4 Special rules apply when dealing with income and capital gains earned from real
property and certain Canadian companies.5
Similar rules apply when Canadian taxpayers receive income from other countries. If the paying
country imposes its own non-resident tax and there is a treaty, the tax withheld may be reduced,
and/or a tax credit is usually available to reduce the tax paid in Canada.

2
These tax rules are outside the scope of this course. The non-resident withholding tax rules are discussed in CETA
3.
3
For example, if a company pays a dividend to a non-resident, the withholding tax must be withheld at the time the
dividend is paid. Or, if interest is paid on a bond or GIC, tax is withheld at source.
4
Non-resident tax treaty rules are outside the scope of this course. They are noted for information and to raise
awareness of potential issues.
5
These rules are outside the scope of this course but are noted to raise awareness of potential issues.

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 Personal Tax Returns Due on Death

8.1.4 Federal and Provincial Taxation and Collection

8.1.4.1 Federal Taxation

The Canadian Income Tax Act6 (ITA) sets out the basic rules for the taxation of
individuals, trusts, corporations, and other entities (collectively referred to as taxpayers).
Canadian taxpayers are also subject to provincial income tax. The tax residence of a trust
depends on a number of factors. The tax residence rules are addressed in CETA 3.

8.1.4.2 Common Law Only: Provincial Taxation

The provincial income tax systems generally parallel the federal rules so that the income
that is subject to federal tax is used as the base for calculating the provincial tax due.
Each province has its own tax rates so combined tax rates differ by province of residence.
Except for Quebec, the federal and provincial taxes are collected at the same time (either
by instalment payments and/or when the federal tax return is filed). The provincial
amount is then transferred from Canada to the province.

8.1.4.3 Quebec Only: Provincial Taxation

Quebec has its own income tax base and system. It is separate from the federal system.
Therefore two returns must be filed – a federal return and a separate Quebec return.
Quebec provincial returns are dealt with by the Quebec Revenue Agency (QRA) under
the Ministère du Revenu du Québec. The Taxation Act7 and the related Regulation set out
the rules for taxation in Quebec. This course only discusses the federal tax rules.

8.1.5 Overview of the Income Tax Act

The ITA has over 260 sections. It is divided into a number of parts. Each part is divided into
divisions and subdivisions. Part I sets out many of the rules that apply to the taxation of
individuals, corporations, partnerships, and trusts. Figure 8.1 provides a list of topics included in
Part I (see Figure 8.1 Canadian Income Tax Act: Part I Outline).

6
R.S.C. 1985, c. 1 (5th Supp.).
7
CQLR, c. I-3.

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 Personal Tax Returns Due on Death

Figure 8.1: Canadian Income Tax Act: Part I Outline

PART I - INCOME TAX

DIVISION A – LIABILITY FOR TAX: S. 2
DIVISION B – COMPUTATION OF INCOME
Basic Rules: SS. 3-4
Subdivision a - Income or Loss from an Office or Employment
Basic Rules: s. 5
Inclusions: SS. 6-7
Deductions: S. 8
Subdivision b – Income or Loss from a Business or Property
Basic Rules: SS. 9–11
Inclusions: SS. 12–17
Deductions: SS. 18–21
Ceasing to Carry on Business: SS. 22-25
Special Cases: SS. 26-37
Subdivision c – Taxable Capital Gains and Allowable Capital Losses: ss. 38-55
Subdivision d – Other Sources of Income: ss. 56–59.1
Subdivision e – Deduction in Computing Income: ss. 60-66.8
Subdivision f – Rules Relating to Computation of Income: ss. 67–80.5
Subdivision g – Amounts Not Included in Computing Income: s.81
Subdivision h – Corporations Resident in Canada and Their Shareholders: ss. 82–89.1
Subdivision j – Shareholders of Corporations Not Resident in Canada: ss. 90–95
Subdivision j – Partnerships and Their Members: ss. 96–103
Subdivision k – Trusts and Their Beneficiaries: ss. 104–108
DIVISION C – COMPUTATION OF TAXABLE INCOME: SS. 109-114
DIVISION D – TAXABLE INCOME EARNED IN CANADA BY NON-RESIDENTS: SS. 115–116
DIVISION E – COMPUTATION OF TAX
Subdivision a – Rules Applicable to Individuals: ss.117-122.5
Subdivision a.1 – Canada Child Tax Benefit: ss. 122.6-122.64
Subdivision a.2 – Working Income Tax Benefit: ss. 122.7-122.71
Subdivision b – Rules Applicable to Corporations: ss.123-125.1
Subdivision c – Rules Applicable to All Taxpayers: ss.126-127.41

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8.1.6 Other Sources of Tax Law

The ITA sets out the rules regarding what income is taxable and when, the deductions and credits
that can be claimed to arrive at taxable income, and the tax rates that apply. It also addresses the
compliance and administrative rules. Additional rules to assist with the interpretation of the ITA
are found in a number of other sources. They include:
• Regulations to the ITA,
• the Income Tax Application Rules (ITARs),
• Canada’s income tax conventions, or tax treaties entered into with other countries, and
• case law.

8.1.7 Government Publications

A number of government publications assist taxpayers and tax professionals to understand the
rules. Two commonly used publication sources for tax professionals are:
1. Interpretation Bulletins and Income Tax Folios: Interpretation Bulletins or “IT
Bulletins” are published by Canada Revenue Agency (CRA). They represent the CRA’s
interpretation of the ITA and do not have the force of law. However, they can be very
helpful in explaining, in everyday language, the purpose and application of tax law on
various topics. In 2013, an initiative to replace IT Bulletins (and other guidance
documents) was initiated. The new documents are known as Income Tax Folios.8
2. Information Circulars: Information Circulars (ICs) are published by CRA to provide
information on administrative and procedural matters.
Other resources for advanced planning include Technical Interpretations, Rulings and Income
Tax Technical News (ITTNs).

8.1.8 Tax Return Preparation Guides

The CRA guides and forms are updated each year for any changes in the rules and tax rates.
See the STEP website under “Student Resources” for a copy of the listing of References to forms
and relevant information resources found in the guide, “Preparing Returns for Deceased
Persons”.

8.1.8.1 CRA Guides

The CRA publishes guides to assist taxpayers and professionals when preparing and
filing tax returns and tax forms. For purposes of estates and trusts, the primary guides are
listed below.

8
The Folio series updates information found in the IT Bulletins and other documents used by tax professionals.
They also introduce improved web functionality. The folios are organized by broad categories into seven series,
subdivided into topic-specific chapters. They are being introduced over a number of years. For more information,
see the CRA website at http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/ntrfls-eng.html.

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 Personal Tax Returns Due on Death

• The General Income Tax and Benefit Package provides the forms and guides
necessary to complete the T1 General Income Tax and Benefit Return, including
the applicable provincial forms.
• The guide Preparing Returns for Deceased Persons (Form T4011) provides
information for executors.
• The T3 Trust Guide (Form T4013) contains detailed instructions for completing
the T3 Trust Income Tax Return and T3 slips for beneficiaries who receive
income from the trust.
These guides and forms are updated each year for any changes in the rules and tax rates.
See the STEP website under “Student Resources” for a copy of the listing of References
to forms and relevant information resources found in the guide, “Preparing Returns for
Deceased Persons”.

8.1.8.2 Quebec Only: Provincial Guides

In addition to the federal guides noted above, Revenue Quebec also provides the
following guides for liquidators and trustees. They include:
• Estates and Taxation (IN-313-V), available at:
http://www.revenuquebec.ca/documents/en/publications/in/in-313-v(2012-08).pdf
• Guide to Filing the Income Tax Return of a Deceased Person (IN-117-V),
available at: http://www.revenuquebec.ca/documents/en/publications/in/in-117-
v(2014-12).pdf

8.1.8.3 Special Topic Guides

Guides are also available for corporate T2 income tax returns, preparation of employee
T4 slips and summary, and preparation of the T5 return of investment income and T5
slips for investors.
Guides dealing with specific types of property and other tax matters are also available to
assist with reporting on a wide range of assets and claiming expenses, such as capital
gains and losses, rental income, business income, registered plan income, Tax Free
Savings Accounts (TFSAs), mutual funds, donations, gifts, disability credits and
expenses, and medical expenses. Others address administrative matters such as paying
tax by instalments and appeals. There is also a guide dealing with the taxation of non-
residents.

8.2 INTRODUCTION TO T1 AND T3 TAX RETURNS

Individuals and trusts earn income from a wide range of sources. Many of these sources were
discussed earlier (see Chapter 5, Estate Assets). In order to provide some context for the
remainder of this Chapter, this section provides a brief introduction to the T1 personal income

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tax form for students who are not familiar with the T1 form. It also includes an introduction to
the T3 income tax form used to report income earned in trusts and estates.
Quebec Only: Revenue Quebec also requires a “Principal Return” for the income earned by a
deceased during the taxation year in which the death occurred (Form TP-1.D-V). As with the
federal return discussed in this Chapter, up to three separate returns may be filed to report:
1. the value of rights and property of the person at the time of death,
2. income from a testamentary trust, and/or
3. income from a partnership or sole proprietorship.
A “Trust Income Tax Return” (Form TP-646-V) is used to report income earned in trusts and
estates in Quebec.

8.2.1 Definitions
A number of terms are used in the field of taxation. Some are specifically defined in the ITA.
Terminology (words and phrases) used in this Chapter is identified here and is also found in the
glossary.
Adjusted Cost Base (ACB): The original price paid for an asset plus any costs incurred to
acquire or improve the property. When referring to stocks, partnership interests, mutual funds,
and other investments, the ACB may be further adjusted by distributions that are a return of
capital to the investor and income earned. See also Chapter 5 at 5.3.6 Cost Information.
Alter Ego Trust: A trust for the sole benefit of the settlor during the settlor’s lifetime. The
settlor must be sixty-five years or older. The settlor is entitled to receive all of the income during
his or her lifetime. Only the settlor can receive or obtain the use of any income or capital during
the settlor’s lifetime. Transfers to the trust take place on a rollover basis (e.g. the assets are
deemed to be sold to the trust at their ACB, so gain arises and the ACB is retained). There is a
deemed disposition of the trust’s assets on the death of the settlor. The rules governing who is
liable for the tax are discussed in CETA 3.
Capital Gain: The amount realized when there is a disposition (sale, gift, or other transfer) of
property in excess of the taxpayer’s ACB.
Capital Loss: The amount realized when there is a disposition (sale, gift, or other transfer) of
property for proceeds lower than the taxpayer’s ACB.
Common-law Partner: Includes a person who co-habits in a conjugal relationship with the
taxpayer either for a continuous period of twelve months or for any period while raising a child
together. It includes same-sex partners who are not legally married. (See ITA, section 248(1).)
Quebec: As noted earlier, common-law relationships are only recognized in Quebec in limited
situations (see Chapter 7 Estate Beneficiaries). The term “de facto spouse” is used to refer to a
person who is not married to the other person or is not a “civil union spouse”. For purposes of
this Chapter, references to “de facto spouses” are references to those who meet the definition of
common-law partner under the ITA. References to common-law partners will include de facto
spouses.

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 Personal Tax Returns Due on Death

Deemed Disposition: The ITA requires that the taxpayer (an individual or a trust) report all asset
transfers as if an asset was sold. Examples of non-sale transfers include gifts, a transfer to a trust,
a transfer of an asset to a beneficiary (resident and non-resident), or a deemed sale when a
Canadian becomes non-resident. The ITA also imposes a deemed disposition when a Canadian
taxpayer dies and when the settlor or spouse in a spousal trust, alter ego trust, or joint spousal or
common-law partner trust.
Fair Market Value (FMV): The amount that could be obtained if an asset was sold on an open
market. See also Chapter 5 Estate Assets.
Graduated Rate Estate (GRE): A new term introduced with the 2015 amendments to the ITA.
An estate that meets the GRE conditions and designates itself as a GRE is entitled to graduated
tax rates and an off-calendar year end. Note that if there are two estates (e.g. two wills dealing
with different assets), only one estate may be a GRE.
Graduated Tax Rate: Different tax rates are applied to each “band” of taxable income.
Joint Spousal or Common-law Partner Trust: A trust for the settlor and his or her spouse or
common-law partner. The settlor must be age 65 or older. The spouse and/or the settlor are
entitled to the income and only the spouse and/or the settlor are entitled to receive or obtain the
use of the income or capital while they are alive. The assets are transferred to the trust on a
rollover basis unless a taxpayer elects otherwise. On the death of the survivor, there is a deemed
disposition.9
Marginal Tax Rate: The effective tax rate on the taxpayer’s entire income, taking into account
the lower tax on income in the lower rate bands. Marginal rates may be stated for the federal
rates only, or may be combined with the provincial rates.
Qualified Disability Trust (QDT): A testamentary trust for a beneficiary who qualifies for a
disability tax credit under section 118.3 of the ITA. If the trust meets the requirements of the Act,
the trustee and beneficiary may make a joint election each year to be a QDT and pay tax on trust
income at graduated rates. If capital is paid to a non-electing beneficiary (e.g. someone who does
not qualify for a disability tax credit), a recovery tax must be paid for income taxed at the lower
rate that is distributed to the non-electing beneficiary. There can only be one QDT for a disabled
individual.
Residence: For tax purposes, this is the jurisdiction where an individual taxpayer is determined
to have closer residential ties. Residence is a question of fact. The rules provide guidance on how
to determine a Canadian taxpayer’s residence when the taxpayer spends significant amounts of
time in another jurisdiction. For the purposes of provincial or territorial tax, the jurisdiction of
residence is the jurisdiction where the taxpayer resided at the end of the year.10 A trust will be
resident where the trustee makes decisions. However, special rules apply if there is more than
one trustee and they are in different jurisdictions, or there is a corporate trustee. These will be
addressed in CETA 3.

9
See CETA 3 for the rules, including the liability for the taxes triggered.
10
The rules for determining one’s tax residence are outside the scope of this course. See CETA 3.

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Rollover: A term used when a disposition (actual or deemed) takes place and the proceeds of
disposition are equal to the ACB. The new owner acquires the asset at the original ACB and tax
is deferred until the asset is sold or deemed to be sold.
Spousal Trust (or Qualified Spousal Trust): A trust (inter vivos or testamentary) that meets the
requirements of the ITA. Generally, the spouse or common-law partner is entitled to all of the
income while the spouse is alive and only the spouse or common-law partner may be entitled to
receive or otherwise obtain the use of the capital or income during the spouse’s lifetime. Assets
are transferred to the trust on a rollover basis11 and there is a deemed disposition on the spouse’s
death. The rules governing who is liable for the tax are discussed in CETA 3.
Spouse: This term is not defined in the ITA but is understood to mean two people who are
legally married or living in a common-law relationship and can include same-sex couples. The
CRA has recently confirmed that an individual can have more than one spouse for ITA purposes
(for example, where a taxpayer is living common-law but has not legally divorced the ex-
spouse).

8.2.2 T1 General Income Tax Return for Individuals

All Canadian taxpayers who earn income must file a T1 General Income Tax Return. It is often
called a T1 Return or a personal tax return. The same form is used for a deceased taxpayer’s final
tax return in the year of death and the optional returns discussed below. The “return for the year
of death” is often referred to as the “final return”, “terminal return”, or “date of death return”
unless it is one of the optional returns. While terminal return will often be used, final return and
date of death return may be used interchangeably in this course and future courses.
Students not familiar with the T1 General Income Tax Return form should visit the CRA website
to look at the latest tax package for the student’s province or territory. Note that there is also a
package for non-residents and deemed residents of Canada.12 Locate and review the four-page
T1 General Return and the two-page Schedule 1 Federal Tax. The remaining schedules and
forms are used, as required, to calculate the amounts to be reported. Students are not required to
review these forms for this course.
Quebec Only: In addition to the federal return, income earned by the deceased during the
taxation year in which the death occurred is reported in a principal income tax return (TP-1.D-
V), which is available online at:
http://www.revenuquebec.ca/documents/en/formulaires/tp/2015-12/tp-1.d-v(2015-
12).pdf.
A guide to filling out this return is available online at:
http://www.revenuquebec.ca/documents/en/formulaires/tp/2015-12/tp-1.g-v(2015-
12).pdf.

11
Subject to an election to increase the ACB of one or more assets.
12
See http://www.cra-arc.gc.ca/formspubs/t1gnrl/llyrs-eng.html.

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Review each form to become familiar with the information that is required and how income is
determined and taxes calculated. In particular, note the following:
T1 General Return:
• Page 1 sets out the information that must be reported about the taxpayer, including
identification, date of death, marital status and jurisdiction.
• Page 2 identifies the types of income that must be reported. This includes employment
income, self-employed income, pensions, investment income and net taxable capital
gains. The taxpayer must also declare foreign property held that exceeds $100,000
Canadian.
• Page 3 identifies the types of deductions that can be claimed to reduce total income to
arrive at net income for the year. These amounts include Registered Retirement Savings
Plan (RRSP) and other pension plan contributions, union and professional dues, carrying
charges and interest expenses related to investments, and net capital losses.
• Page 4 sets out the amounts that reduce tax payable as calculated on Schedule 1 (Federal
Tax) and the applicable province or territory (excluding Quebec and non-residents or
deemed residents). Individuals are taxed at graduated rates. While the federal rates are
applied to everyone, the provincial rates differ. Taxes already withheld at source and
instalment payments are also captured here.
Schedule 1 – Federal Tax:
• Page 1 sets out the many non-refundable tax credits that the taxpayer may be eligible to
claim. These include the basic personal amount, an age amount (for those over age
sixty-four), amounts for spouses and dependants, Canada Pension Plan/Quebec Pension
Plan (CPP/QPP) contributions, medical expenses, tuition, donations, and amounts for
special circumstances such as caregivers and disability. These credits are used to reduce
the tax payable.
• Page 2 sets out the calculation of federal tax payable, and then provides for deductions,
including the non-refundable tax credits on page 1, foreign tax credits, and political
contributions.
Quebec Only: Note the similarity on principal return – page 1 sets out taxpayer information,
page 2 identifies income earned and deductions in order to determine the net income, page 3
calculates taxable income and tax credits are claimed, and pages 3 to 4 calculate the tax due or
refund.

8.2.2.1 Marginal Tax Rates

Canadian taxpayers are taxed at graduated rates. This means that different tax rates are
applied to each “band” of taxable income. The graduated rates for purposes of calculating
the federal income tax due (using the 2018 tax rates) are:
• On the first $46,605, the federal tax rate is 15%.
• On the next $46,603 (amount over $46,605 up to $93,208), the federal tax rate is
20.5%.

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• On the next $51,238 (amount over $93,208 up to $144,489), the federal tax rate is
26%.
• On the next $61,353 (amount over $144,489 up to $205,842) the federal tax rate
is 29%.
• 33% on taxable income over $205,842.
Marginal tax rates are the effective tax rate on the taxpayer’s entire income, taking into
account the lower tax on income in the lower rate bands.13
Each province or territory sets rate bands as well. The bands do not match the federal
bands so each jurisdiction has its own Schedule for calculating provincial taxes dues.
See the CRA website for the current year tax rate bands by jurisdiction.14
For a basic example of how marginal tax rates are calculated, see Figure 8.2 Marginal
Tax Rates (Federal Taxes Only) – Example. It does not take into account provincial
taxes. Nor does it incorporate the different tax rates that apply to different kinds of
income.
Figure 8.2: Marginal Tax Rates (Federal Taxes Only) – Example
If taxable income is … Then the tax payable is … And the marginal tax rate is
…
(based on 2018 rates)
Payable Calculation Rate
$46,605 $ 6,990 $46,605@ 15% 15%
$93,208 $ 16,543 $6,990 + 19%
$9,553 ($46,603@ 20.5%)

$144,489 $29,879 $ 16,543 + 21%

$13,336 ($49,185 @ 26%)
$205,842 $47,671 $29,879 + 23%
$13,336 ($49,185 @ 29%)
over $205,842 $ 58,327 24%
(Example: Taxable income $47,671 +
is $238,586)
$10.805 ($32,744 @ 33%)

8.2.3 T3 Trust Income Tax and Information Return

The T3 Trust Income Tax and Information Return is filed by trustees for inter vivos and
testamentary trusts. It is generally referred to as a trust return or T3 return.

13
Different types of income can also be subject to different tax rates. For purposes of this Chapter, these additional
tax rate distinctions are ignored.
14
See http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html.

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 Personal Tax Returns Due on Death

The T3 return is also used to report income earned by an estate after the date of death. It is filed
by the executor annually until the administration and distribution of the estate assets has been
completed. Although terminology varies, when a T3 return is being filed for an estate, it is often
referred to as an “estate return”. This distinguishes the return from a T3 return for an ongoing
testamentary trust or an inter vivos trust. However, it is important to not confuse an estate return
(i.e. a T3 return for an estate) with the terminal return (T1 return) for the deceased in the year of
death.
For purposes of this course and future courses, the terminology “T3 return” or “trust return” is
used to refer to tax returns for testamentary and inter vivos trusts. The terminology “estate
return” is used to refer to a T3 return that is filed by an executor for the period following the date
of death. Estate returns are filed annually up to and including the year of the final distribution to
the estate beneficiaries.
Students should review the current T3 form on the CRA website.15 Note the following:
• The range of information that must be reported about the estate or trust (pages 1-2).
• Specific details to be noted include:
o The trust has a trust account number beginning with the letter T. This is the trust’s
taxpayer identification number. It is like a SIN number for an individual taxpayer.
o The type of trust must be identified. For purposes of this course and the CETA
certificate, the types of trusts that might be indicated are spouse or common-law
partner trusts, alter ego trusts, and joint spousal or common-law partner trusts, as well
as personal trusts, which are all other testamentary or inter vivos trusts for persons or
purposes created by an individual, including estates.
o The residence of the trust or estate for tax purposes must be indicated.
o The questions on page 2 identify situations where special rules may be applied. These
are reviewed in CETA 3.
• Total income includes investment income and certain pension income (see page 2).
• Eligible deductions that can be claimed where applicable are identified on page 3. They
include:
o carrying charges and interest expense,
o investment counselling fees,
o capital losses, and
o certain other losses.16
• Page 3 adds to the trust’s income the value of any taxable benefit that arises when a
beneficiary uses or occupies a property or receives any other benefits from the trust.
• The trust’s taxable income may be reduced by the amount of income distributed to
beneficiaries in the taxation year (page 3).
• There are fewer deductions available to reduce the tax payable, and a T3 return does not
provide for non-refundable tax credits such as those available on the T1 return.

15
See http://www.cra-arc.gc.ca/E/pbg/tf/t3ret/README.html
16
The rules governing the types of income losses that may apply are beyond the scope of this course.

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Additional forms will need to be completed in order to finish the calculations of the final
amounts to be reported on the T3 return. The T3 return form is also used to determine the
provincial or territorial tax due for all jurisdictions in Canada, except Quebec.
Quebec Only: Where the succession has earned income before the distribution of the property
(aside from the death benefit from the Québec Pension Plan or the Canada Pension Plan), the
liquidator must also file a Trust Income Tax Return (form TP-646-V) with revenue Quebec. The
form is available online at:
http://www.revenuquebec.ca/documents/en/formulaires/tp/tp-646-v(2015-10).pdf
A guide to filling out the Trust Income Tax Return is available online at:
http://www.revenuquebec.ca/documents/en/formulaires/tp/tp-646.g-v(2015-10).pdf

8.3 FINAL TAX RETURNS FOR THE DECEASED

The executor must file a final or terminal return for the year in which a taxpayer dies. Three
optional returns may also be filed to report specific types of income. Returns for prior years must
also be filed if applicable. Each return is discussed briefly below.

8.3.1 T1 Terminal Return

A T1 General Return is used to file the deceased’s terminal return. This return reports all income
earned from January 1 up to and including the date of death, rather than December 31. The
amounts include:
• employment income, including vacation pay,
• business income from unincorporated businesses,
• pension income,
• income from personal trusts, and
• investment income.
In addition, the terminal return must report additional income items, including:
• the net taxable capital gain (or losses) arising from the deemed dispositions of assets,
• accrued income due to the deceased, and
• the value of RRSPs and Registered Retirement Income Funds (RRIFs) held by the
deceased (subject to certain exceptions).

8.3.1.1 Deductions and Non-refundable Tax Credits on the Terminal

Return
The usual deductions and non-refundable tax credits may be claimed on the terminal
return. Special rules may also apply. These include estates where:
• the deceased has eligible medical expenses, or
• assets are left to one or more charities.

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8.3.2 Exceptions to Deemed Disposition Rules on Death

Although there is a deemed disposition of all property owned at the date of death, there are a
number of exceptions and/or special rules. These include:
• assets are left to a spouse or common-law partner,
• property was settled in a qualifying spousal or common-law spouse trust,
• the deceased owned farm or fishing property,
• the deceased owned eligible shares of a small business corporation, and
• the deceased died owning an RRSP or a RRIF.
The rules that apply to these scenarios are addressed in CETA 3 and are briefly discussed below.
Reminder: See definitions of spouse and common-law spouse above (see 8.2.1 Definitions).

8.3.2.1 Testamentary Spousal Trusts and the ACB of Trust Assets

If a deceased leaves assets to his or her spouse or common-law partner, or the assets are
left in a trust for a spouse or common-law partner that meets the requirements to qualify
as a spousal trust under the ITA, there is a deemed disposition of the assets and the estate
acquires the assets at the deceased’s ACB. If the assets are distributed to the spouse in
Canada or to a testamentary spousal trust, the ACB is retained. Unrealized capital gains
are triggered when the surviving spouse or the trust sells the asset, or when the surviving
spouse dies.
The executor may elect to increase the ACB of any asset owned at the date of death up to
any amount between the deceased’s ACB and the FMV on the date of death.
Examples:
Rollover of the ACB: Aiden died leaving real estate with an ACB of $400,000 and a
FMV of $500,000 to be held in a spousal trust for his wife, Mia. The executor did not
elect out of the rollover. Therefore, on the terminal return there was no capital gain
arising from Aiden’s death and no tax was payable by the estate. Mia died four years
later. The spousal trust still held the original real estate and it had increased in value to
$800,000. On Mia’s death, the trust is deemed to dispose (sell) the real estate for its FMV
of $800,000, triggering a capital gain of $400,000.17
Election to increase the ACB: If Aiden had died holding another investment with a
$50,000 loss, the executor might elect to recognize a deemed disposition of the real estate
for $450,000, triggering a $50,000 capital gain. This allows the executor to offset the

17
See CETA 3 for the rules on who is responsible for paying the tax on the deemed capital gain.

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$50,000 capital gain on death with the loss.18 When Mia dies, the capital gain will only
be $350,000 ($800,000 - $450,000).

8.3.2.2 Introduction to Taxation of RRSPs and RRIFs on Death

When an annuitant (the owner of the registered plan) dies, the FMV of his or her RRSPs
or RRIFs is included as income on the terminal tax return. This amount is called a
“refund of premiums”. The beneficiary receives the refund of premiums tax free. The
estate must pay the tax. If the estate does not have the funds to pay the tax, the CRA will
seek to have the tax paid by the beneficiary.
There are two general exceptions to these rules that allow for a deferral of this tax. If the
exceptions apply, the estate does not pay the tax. Tax is paid by the beneficiary when he
or she receives the funds. The exceptions are:
1. A Spouse is Designated as the Successor Annuitant of a RRIF: In this
situation, there is no refund of premiums. The surviving spouse or common-law
partner becomes the annuitant and the owner of the RRIF. Tax is paid as funds are
paid from the RRIF to the survivor. On the survivor’s death, there will be a
deemed disposition and the refund of premiums for the balance remaining in the
RRIF will be reported on the survivor’s terminal return.
2. A Qualified Beneficiary is the Named Beneficiary of a RRSP or RRIF, or
Receives the Plan as Part of his or her Share of the Estate: In this situation the
rules allow the executor to make an election to claim a corresponding deduction
for the value of the refund of premiums. The plan is transferred to a plan for the
beneficiary or, in the case of a minor beneficiary, an annuity can sometimes be
purchased. This deferral of tax is also often referred to as a rollover. Rollovers are
not mandatory and careful planning may be required to maximize the benefit to
the beneficiary and minimize the tax payable by the estate.
A qualified beneficiary includes the deceased annuitant’s:
• spouse or common-law partner (see earlier definition),
• child or grandchild (under eighteen) who was financially dependent on the
annuitant, or
• child or grandchild (eighteen or over) who was financially dependent on the
annuitant because of an impairment in physical or mental functions.
The ITA sets out rules for determining whether a child or grandchild is financially
dependent. The CRA provides further information. The general rules are:

18
Note: The executor can select a deemed disposition value between the ACB and FMV. If Aiden had investment(s)
with a total loss of $100,000 or more, the executor would elect out of the rollover so the loss could offset the
entire capital gain on real estate. On Mia’s death there would only be a capital gain of $300,000.

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• A rollover is available if the plan assets are transferred to the plan of the surviving
spouse or common-law partner within sixty days (or a longer period if agreed to
by the CRA) after the year of death.
o The executor makes an election to deduct the amount of the refund of
premiums from the income reported on the terminal return so the estate does
not pay tax on the terminal return.
o The spouse is taxed at the time the funds are withdrawn from the plan or on
the death of the spouse.
• In some situations it may be mutually beneficial for the surviving spouse to
receive the refund of premiums tax free and to allow the income to be reported in
the final return of the deceased. In this case the executor would not make the
election. This might be done if the tax payable can be offset by deductions or
credits available in the terminal return.
• If the spouse or common-law partner spouse is not the named beneficiary, but will
take the plan proceeds as part of his or her share of the estate, the spouse and
executor may make a joint election for the rollover treatment.
• If the beneficiary of an RRSP or RRIF (whether designated or taking under the
will) is an eligible, financially dependent child or grandchild who is a minor, the
plan proceeds can be used to purchase an annuity that meets the conditions set out
in the ITA. The executor will make the election to deduct the amount of refund of
premiums from the taxable income in the terminal return.
• If the beneficiary of an RRSP or RRIF is a financially dependent adult, the plan
may be rolled into the beneficiary’s own RRSP or a Registered Disability Savings
Plan (RDSP).19 Again, the executor will make the election to deduct the amount
of the refund of premiums. The ITA defines “financially dependent”.

8.3.2.3 Due Dates for Terminal Returns

If the date of death occurred between January 1 and October 31, the terminal tax return is
due by April 30 of the following year, the same date all T1 returns are due. If the date of
death was between November 1 and December 31, the tax return is due six months after
the date of death.
Quebec Only: The principal income tax return – Form TP-1.D-V – is due on the same
dates.
Any taxes owing must be paid by the due date. If the taxes owing are not paid by the due
date, interest will be added to the final tax bill. If the return is filed late, penalties will
also be charged. (See 8.7 Penalties and Interest Charges.) Extended filing deadlines may

19
For a discussion of RDSPs on death, see Chapter 5 at 5.4.9.5 Registered Disability Savings Plans. For tax
purposes, the 2013 Guide summarizes the treatment of an RDSP as follows: “If the beneficiary of an RDSP dies,
the RDSP must be closed no later than December 31 of the year following the year of the beneficiary’s death. Any
funds remaining in the RDSP, after any required repayment of government bonds and grants, will be paid to the
estate. If a disability assistance payment (DAP) had been made and the beneficiary is deceased, the taxable portion
of the DAP must be included in the income of the beneficiary’s estate in the year the payment is made.”

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apply if the deceased was carrying on a business as a partner or sole proprietor but the
deadline for payment of taxes is not extended.

2015 Transition Period Continues in 2016:

Changes introduced in 2015 impact amounts reported on terminal and estate returns. There
will be a period of time where the new forms are not yet available. The CRA website states
that “If a person dies in 2016, the legal representative may choose to file the final return at
any time after the date of death. The returns will generally be processed at that time as a
service to the estate. In these cases, the returns will generally be processed using tax
legislation applicable to the 2015 tax year. The legal representative can then request a
reassessment of the return in the following year (2017) to apply any tax changes introduced
for the 2016 tax year.”
http://www.cra-arc.gc.ca/tx/ndvdls/lf-vnts/dth/fnl/d-eng.html

8.3.3 Optional Returns

Certain income may be reported on separate T1 returns for the year of death. There are specific
rules for each return. The rules set out the income that can be reported and the deductions and
credits that can be claimed. With the exception of the Rights and Things Return, the return due
dates follow the same rules as the terminal return.
Each return is briefly described below. The most recent version of the CRA summary of the rules
discussed below can be found on the STEP website under “Student Resources”.

8.3.3.1 Rights and Things Return

The executor may elect to file a separate return for “rights or things” of the deceased
person as at the date of death. If the return is filed, all rights and things must be included.
Quebec Only: The Revenue Quebec form is call a “rights and property” return.
Rights or things are amounts that:
• have been earned prior to death,
• are unpaid at the time of death,
• are payable at the time of death, and
• would have been included in income of the deceased when received.
The amounts qualifying as rights or things are relatively limited, and include:20
• salary, commissions, and vacation pay owed before the death and paid after death,
• retroactive salary adjustments owed and paid after death,

20
Source: CRA Guide to Preparing Returns for Deceased Persons 2015 – Appendix http://www.cra-
arc.gc.ca/E/pub/tg/t4011/t4011-e.html.

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• Old Age Security (OAS), Canada Pension Plan/Quebec Pension Plan (CPP/QPP)
paid after the date of death for the month of death,
• CPP and Employment Insurance (EI) arrears,
• universal child care benefit (UCCB),
• accounts receivable, supplies, and inventory,
• uncashed matured bond coupons,
• bond interest earned and payable but not received before death,
• dividends declared before the date of death, but not received including ex-
dividends,
• supplies on hand, inventory, and accounts receivable if the deceased was a farmer
or fisher and used the cash method;
• inventory of an artist who has elected to value his or her inventory at nil;
• livestock that is not part of the basic herd and harvested farm crops, if the
deceased was using the cash method; and
• work in progress if the deceased was a sole proprietor and a professional (an
accountant, a dentist, a lawyer (in Quebec an advocate or notary), a medical
doctor, a veterinarian, or a chiropractor) who had elected to exclude work in
progress when calculating his or her total income. .
While a limited number of deductions will be available on most rights and things returns,
it is often possible to reduce, and sometimes eliminate, the tax on the income reported on
this return. This is because:
• The personal amounts of the non-refundable tax credits can be claimed in full to
reduce the taxable income. These are the amounts on lines 300-306 and 367 on
page 1 of the Federal Income Tax Schedule 1. Personal amounts include the basic
amount and, where applicable, the:
o age amount,
o spouse or common-law partner amount,
o amount for eligible dependant,
o amount for infirm dependant,
o amount for children (under 18), and/or
o caregiver amount.
• Other non-refundable tax credits may also be claimed but the credit can only be
claimed once so the executor may need to decide which credits should be claimed

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on other returns to minimize the estate’s total tax liability. These amounts include,
where applicable:21
o pension income amount,22
o disability amount,
o medical expenses, and/or
o charitable donations.
• The graduated tax rates apply to the taxable income, instead of the deceased’s
effective tax rate on the main Terminal Return.
Example: If Lily was eighty years old at the time of death and had $5,000 of income that
can be reported on a Rights and Things Return, her executor can claim the basic
personal amount and age amount non-refundable tax credits. This will likely eliminate all
tax due on this income due to Lily at her date of death. Each situation must be analyzed
by the tax preparer in order to minimize the overall tax payable by the estate.
The due date for filing a rights or things return, and the deadline for making an election to
file a rights or things return, is the later of one year from the date of death or ninety days
after the mailing of any notice of assessment in respect of the tax payable for the year of
death.

8.3.3.2 Returns for Income from a Testamentary Trust

If the deceased is a beneficiary of a testamentary trust that does not have a
December 31 year end, and the deceased died after that year end but before the
end of the calendar year, the income earned and/or payable can be reported on a
separate return. This period is often referred to as the “stub period”. The return
due date is the same as the due date for the terminal return. NOTE: For estates
that begin in 2015 or later, these situations will only arise when a beneficiary of
an estate dies before the estate is fully distributed, and the estate is a graduated
rate estate.
Example: A testamentary trust has a June 30 year end. The revenue beneficiary, Kyle,
dies on December 1, 2017.
In this scenario, the trust will have issued a T3 slip to Kyle for income earned from July
1, 2016, to June 30, 2017. Kyle’s executor must report this income on the terminal return.
If the income earned from July 1, 2017, to December 1, 2017, is also reported on the
terminal return, seventeen months of income will be reported. The optional return allows
the executor to report the five month stub period income separately and claim the

21
See the Appendix to the CRA Guide to Preparing Returns for Deceased Persons in the Student Resource area for a
full list of which non-refundable tax credits may be claimed in full or must be split.
22
This amount can only be claimed on returns where the related income was reported.

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personal amount credits, along with other credits as applicable. Again, this will help to
reduce or eliminate the tax due on the stub period income.

8.3.3.3 Returns for a Partner or Proprietor

If the deceased was a partner or sole proprietor of a business with a year end that is not
December 31, and the deceased died after the year end, a stub period return may be filed
to avoid taxing more than twelve months of income in the terminal return. The due dates
are the same as for the terminal return. These returns are rarely required.

8.3.4 Prior Years’ Tax Returns

All outstanding tax returns from previous years that the deceased was required to file during his
or her lifetime must be filed. If the deceased died between January 1 and April 30 without having
filed the previous year’s return, the tax return should be filed no later than six months after the
date of death. No interest or penalties will be payable until six months after the date of death.
If the deceased’s death occurred after April 30, the prior year’s return is already late, and interest
and penalties will apply. Penalties may be relieved, at the Minister’s discretion, under the
taxpayer relief measures if the late filing was the result of the deceased’s illness or other
extenuating life events. Interest, however, will not be relieved.
Example: Liam died on April 1, 2018. He had not yet filed his return for 2017, which was due
on April 30, 2017. Liam’s executor must file the 2017 return no later than October 1, 2018, to
avoid late filing penalties and interest. The terminal return, however, is not due until April 30,
2019.

8.3.5 Foreign Tax Returns

A tax return may have to be prepared and filed in another country in respect of income and/or
inheritance tax if the deceased:
• owned foreign real property,
• received certain foreign source income,
• was domiciled in another country at death,
• was a citizen of the U.S., or
• was domiciled in the U.S. or was a U.S. Green Card holder.
As in Canada, prior year tax returns will also need to be filed. Appropriate foreign tax advice
will be required to determine the returns due and the due dates.

8.3.5.1 U.S. Estate Tax Return

A U.S. Estate Tax Return may be required if the deceased was:
• a U.S. domiciliary (primarily a U.S. citizen or U.S. Green Card holder), or
• owned U.S. property with a value exceeding $60,000US.

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The U.S. Estate Tax Return must be filed even if there is no U.S. tax liability. The
exemptions and credits available under the Canada/U.S. tax agreement that eliminate or
reduce the liability apply only if a return is filed.
U.S. assets for the purpose of U.S. estate tax and the requirement to file a return include,
among other U.S. situs assets, securities issued by U.S. corporations, and U.S. real estate
or an interest in real estate located in the U.S.
U.S. Estate Tax returns are due nine months after the decedent’s death. A six-month
automatic extension may be obtained by timely filing an extension request.
NOTE: Third parties responsible for releasing assets to a foreign executor will
usually require evidence that the U.S. estate tax liability has been paid.

8.4 T3 TRUST RETURNS

A T3 Trust Return is filed by an estate to report income earned by the estate after the date of
death. T3 returns are also filed for testamentary and inter vivos trusts. There are a number of
rules that apply to the taxation of estates, testamentary trusts, inter vivos trusts, and their
beneficiaries. The rules identify income to be included on the T3 return and eligible deductions.
They also provide for elections that can be made by an executor, trustee, and/or beneficiary to
prevent double taxation or minimize tax for the estate, trust, and/or beneficiary. These are
reviewed in CETA 3.
Quebec Only: Revenue Quebec also requires a Trust Income Tax Return (Form TP-646-V).
This section deals with the taxation of trusts and the beneficiaries (including estates) generally.

8.4.1 Income Included on a T3 Return

All income earned prior to distribution by the estate or trust must be reported on the T3 return.
Trust income is often limited to investment income (including capital gains) but it may include
other types of income. The CPP/QPP Death Benefit is also reported on the first estate T3 return
(unless it was the only income that would be included in the return, in which case the heirs
include it in their income).

8.4.2 Deductions from Income Reported on a T3 Return

A trust is a taxpayer. Therefore, all income earned is taxable. However, when income is paid or
payable to a beneficiary, it is generally treated as “flowing through” the trust to the beneficiary.
When there is a “flow through” of income, all income earned by the trust and then paid to a
beneficiary is deducted from the trust’s income.23 The income information is provided to the

23
The elections that may be available to tax the income in the trust and not the beneficiary’s hands are covered in
CETA 3. Other elections may allow the trustee to allocate income to a beneficiary that is not paid to a beneficiary.
Neither of these rules are reviewed in this Chapter.

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beneficiary on a T3 slip. The beneficiary reports the income on his or her personal tax return and
the income is taxed in his or her hands.
Example: In 2015, an inter vivos trust for Tyler earned $10,000 in interest income and $15,000
in dividends. Tyler is the revenue (income) beneficiary and received the interest and dividend
amounts during the trust’s tax year as required by the terms of the trust.
When the trustee prepares the T3 return, the full amount of the interest and dividends earned
must be reported. However, the trustee will claim a corresponding deduction for the income paid
(allocated) to Tyler.
The amount that has been paid or is payable to Tyler is deducted from the trust’s taxable income
and a T3 slip is issued to Tyler. The T3 slips reports the income allocated to Tyler. Because Tyler
is a Canadian resident taxpayer, the T3 slip will designate the income as interest income and
dividend income. Tyler will report these amounts in the applicable lines of his own T1 tax return
and will obtain the benefit of any of the special tax treatment that applies to the dividends.
If Tyler lives in the Unites States, his allocation would be listed on a T3-NR form (not a T3 slip)
as estate and trust income, with no designation for the type of income. In addition, the 15% NR
Tax withheld at the time the income was paid will be reflected on the tax slip he receives. (See
8.5 Distribution to Non-residents (NR Tax).)
If the trust sold assets in the year and taxable capital gains were realized, the trust would pay tax
on the taxable capital gains.24
If the trust was a discretionary trust and some or all of the interest and dividend income was not
paid to Tyler during the year, the trust would not have a deduction and would pay the tax on the
interest and/or dividends.

8.5.1.1 Exception for Estate T3 Return

During the administration of an estate, the executor may tax the income in the estate, or
elect to treat the income as being earned by the beneficiary. If the executor makes this
election, a T3 slip is issued and the beneficiary reports the income on his or her personal
tax return in the same way as if the beneficiary was the beneficiary of a trust.

8.4.3 Calculation and Payment of Trust Taxes

Income taxed in an inter vivos trust is taxed at the top tax rate. There are no graduated rates.
However, the ultimate tax payable (the marginal rate) will depend on the provincial or territorial
tax rate that is applied.
Estates and testamentary trusts have enjoyed the benefit of the graduated rates that apply to
individuals. However, after 2015 the graduated rates will only apply to qualified disability trusts

24
Capital gains are generally not considered income for trust purposes and would not be paid out to the revenue
beneficiary as part of the annual income. See Chapter 9 Compensation and Expenses, for a discussion of
beneficiary entitlement to income and capital.

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and graduated rate estates. (See definitions at 8.2.1 Definitions).). These rules are addressed in
CETA 3.

8.4.3.1 Due Dates

All T3 returns are due ninety days after the trust or estate’s year end. Inter vivos trusts
have a year end of December 31 and the return is due ninety days later. In a leap year, the
deadline is March 30 instead of March 31. Beginning in 2015, all testamentary trusts now
have a December 31 year end.
Beginning with deaths in 2015, an estate that is eligible to elect to be a graduated rate
estate will be able to elect to have a fiscal year end rather than a December 31 year end
for up to thirty-six months. The date may be any date up to and including the anniversary
of the date of death. This allows for tax planning, and avoids the need to file a T3 return
shortly after the date of death when the date of death was late in the year. The rules for
qualifying as a graduated rate estate and the planning opportunities are addressed in
CETA 3.

8.4.3.2 Final Trust Return

In the year that an estate winds up, or a testamentary or inter vivos trust is fully
distributed, a final T3 return may be filed for the trust for the shortened year. For
example, if the distribution for a trust will be completed on May 10, and the trust’s year
end has always been December 31, the trustees can file a T3 for the period ended May
10. It is not necessary to wait until the following year.

8.4.3.3 T3 Slips and Beneficiaries

T3 slips must be sent to beneficiaries by the due date for the T3 return. Where the trust
year end is December 31, the beneficiary will include the T3 slip information on his or
her personal tax return for that calendar year along with employment and other income
sources.
If the estate has a year end that is not December 31 (a fiscal year end), the estate
beneficiary(ies) entitled to the income will receive a T3 slip that indicates the total
income allocated for the period ending on the fiscal year end date. The income reported
on the T3 slip will be reported on the beneficiary’s personal tax return that includes the
estate’s fiscal year end.
Example: A graduated rate estate has a January 30 fiscal year end. The estate takes over
a year to administer and has earned $10,000 of interest in the first year. The interest was
paid to the residual beneficiaries. The executor prepares the trust return for the period
ending January 30, 2018, the fiscal year end date and allocates $5,000 of interest income
to Ivan and $5,000 to Tara, the two residual beneficiaries of the estate. Ivan and Tara
will each receive a T3 slip that shows they received $5,000 in interest income for the
period July 1, 2017, to January 30, 2018. When Ivan and Tara prepare their 2018
personal tax returns (which are due April 30, 2019), they will include the $5,000 from the

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T3 slip. If the estate is not wound up before January 2019, the executor will file another
T3 return for the period February 1, 2016, to January 30, 2019. Ivan and Tara will not
report income paid to them after January 30, 2018, until they file their 2019 tax returns
in 2020.

8.5 DISTRIBUTIONS TO NON-RESIDENTS (NR TAX)

Distributions of income and capital to non-residents of Canada may have tax consequences for
estates and trusts.
When income is paid to a beneficiary not resident in Canada, non-resident withholding tax (NR
Tax) will usually have to be withheld. The withholding rate is 25% unless there is a treaty with
the beneficiary’s home country for a reduced rate. For example, interest and dividend income
paid to beneficiaries who are taxed in the U.S. and United Kingdom is only 15%.
In addition, if assets are distributed to a non-resident of Canada, there is a deemed disposition by
the trust or estate. If there has been an increase in the FMV of an asset that is being transferred to
a beneficiary, a capital gain may be triggered. If there is a capital gain NR Tax will usually have
to be withheld on the taxable portion of the capital gain for Canadian income tax purposes.

8.5.1 Taxation of Beneficiaries in Home Jurisdiction

Distributions from an estate are not usually taxed in the beneficiary’s home country. However
income received from an estate or trust will often be subject to reporting in accordance with the
beneficiary’s home jurisdiction. Some jurisdictions apply special rules to distribution of capital
from a trust. These rules can be onerous and complex. Non-resident beneficiaries should be
advised to seek tax advice.

8.6 ASSESSMENT NOTICES AND OBJECTIONS

Once the CRA has reviewed the tax return filed, it will issue a Notice of Assessment. The Notice
will agree with the amounts reported and tax paid, or it may identify errors and additional
amounts payable. It will also indicate the amount of any refund due.
If the taxpayer disagrees with the Notice of Assessment, an objection may be filed. For
testamentary trusts and estates, the objection must be filed the later of:
• one year after the filing deadline of the tax return, or
• ninety days after the mailing date of the Notice of Assessment.
For inter vivos trusts, the objection must be filed within ninety days after the mailing date of the
Notice of Assessment. The tax preparer will assist with this process.

8.7 PENALTIES AND INTEREST CHARGES

Failure to file a required tax return by the due date will result in a late filing penalty. The amount
due is 5% of the balance payable, and 1% for each complete month the return remains
outstanding for a maximum of twelve months. Interest is also charged on unpaid taxes.

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The interest rate due on unpaid taxes is set every three months. It is calculated and compounded
daily beginning from when the tax was due. Where a taxpayer is owed a refund, the refund is
paid with interest from the latest of:
• the thirty-first day after the return is due,
• the thirty-first day after the return is filed, or
• the day after the overpayment arises.
Penalties and interest are included on the assessment notice.
Examples: Grace died on November 15, 2017. Her terminal return is due May 15, 2018, six
months after her date of death. Assume the final amount due on Grace’s terminal return is
calculated to be $10,000.
If Grace’s terminal return is not filed until August 4, a late filing penalty of $500 plus $100 per
month for the months of June and July will be payable for a total of $700. In addition, interest at
the prescribed rate, compounded daily will be assessed from May 16 until August 4.
If the return had been filed, but no tax paid, the late filing penalty would have been avoided.
If the return had been filed on May 1, 2018 (two weeks before it was due), and $12,000 had been
paid, the CRA will refund the $2000, with interest calculated from June 15, thirty-one days after
the return was due.

8.8 TAX CLEARANCE CERTIFICATE

A Tax Clearance Certificate protects an executor or trustee from personal liability. If the
executor distributes assets of the estate or winds up a trust prior to receiving a clearance
certificate, he or she may be personally liable for any taxes owing if there are not sufficient funds
remaining to cover outstanding amounts due.
A clearance certificate is issued by the CRA. It is written confirmation that all tax liabilities of
the deceased have been paid or that acceptable security for payment has been provided. CRA still
may reassess in respect of additional taxes within certain time limits, but the executor or trustee
will not be personally liable for any reassessments.
Quebec Only: The liquidator must also file a Notice Before Distribution of the Property of an
Estate (Form MR-14.A-V,) and the Ministère du Revenu du Québec will issue Certificates
authorizing the distribution of the property of the estate.
Once all assessments have been received and any objections settled, and the executor or trustee is
ready to distribute the estate or trust assets, a Tax Clearance Certificate on Form TX19 from
CRA.
Quebec Only: A provincial form, an “authorization to distribute”, from Revenu Quebec, should
also be obtained.
The executor or trustee must establish a scheme of distribution on a date chosen by the executor
or trustee that is prior to the date of the request, and calculate the tax payable as if final
distribution had occurred on that date.

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Clearance certificates are now issued by CRA in anticipation of a final distribution. It is no

longer possible to obtain a certificate limited to a deceased person’s taxes, or for partial
distributions. If interim distributions are to be made, the executor or trustee will usually require
that the beneficiaries provide an indemnity should further taxes be assessed and there are
insufficient funds to cover the liability.
Quebec Only: It is possible to obtain authorization to distribute a portion of the estate prior to
final distribution. Quebec law also gives the liquidator authority to distribute (pay debts) up to
an amount of $12,000 prior to obtaining authorization to distribute. However, if this amount is
exceeded, the liquidator becomes personally liable for payment of tax debts, duties, interest, or
penalties up to the value of the property distributed and QRA will not issue authorization.
In addition a generous amount is often retained to cover the risk of any further tax assessments.
Each situation will depend on what is known. There are three general situations:
1. Estate with No Trusts: In this situation the executor will need to ensure that all past
taxes have been paid, along with the taxes due on the terminal and optional returns. In
addition tax payable on any estate return income that has not been allocated to
beneficiaries must also be settled.
2. Estates with Testamentary Trusts:
All provinces and Territories Except Quebec: In this situation, it is no longer possible
to obtain a clearance certificate for the deceased’s taxes. Therefore, a clearance
certificate can only be requested when the testamentary trust is wound up. Alternatively,
one practice is to wind up the estate account by distributing the assets to new trust(s) and
applying for a new trust account for each ongoing trust whether or not there is only one
trust or a number of trusts.
Quebec Only: The estate would be wound up and distributed to the testamentary trust or
trusts, each of which would receive its own tax number.
3. Inter Vivos Trusts: The trustee will request a clearance certificate prior to winding up
the trust. There are no concerns with respect to the settlor’s personal tax situation.
Note that all spousal trusts, whether inter vivos or testamentary, and all alter ego and joint partner
or joint spousal trusts must ensure that the tax liability on the death of the beneficiary has been
settled. In addition, it will be necessary to ensure that any recovery taxes are paid when a
qualified disability trust is distributed. See definitions at the beginning of this Chapter (see 8.2.1
Definitions) and CETA 3.

8.9 A WORD ON SPOUSAL TRUSTS, ALTER EGO TRUSTS, AND

JOINT PARTNER TRUSTS
As noted above when a deceased leaves assets to a spouse, or creates a spousal trust in a will,
special tax rules apply on the terminal return and where there is a spouse trust, when the spouse
dies. (See 8.3.1.1 Deductions and Non-refundable Tax Credits on the Terminal Return.) Similar
rules apply when an inter vivos trust is created for a spouse or common-law partner. The settlor

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reports a deemed disposition at the settlor’s ACB unless an election is made to increase the ACB.
There is a deemed disposition at FMV when the spouse dies. Similar rules apply to alter ego
trusts and joint spousal or common-law partner trusts. See 8.2.1 Definitions.

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