Saturday, September 11, 2010

What is a T3 tax return?

When a person passes away, his or her executor files a tax return for the last year of the deceased's life. That is a T1 tax return. Executors are sometimes surprised to find that they may have to file a tax return for the estate itself, as opposed to for the deceased person. A tax return for an estate or trust is a T3 return.

An estate or trust is considered a "person" for taxation purposes. Just as a living person files a tax return each year to report income, so does an estate or trust.

An estate's tax year begins the day after a person passes away and continues for one year. Any income earned by the estate during the tax year is reported on a T3 return, and is set off against available deductions and exemptions just as it is for a living person. Income earned by an estate may be in the form of capital gain, dividends or interest. If an estate doesn't earn any income, it may not be necessary to file a T3 return.

If an estate carries on for many years, a T3 return has to be filed for each year. When the estate is wound up and all of its assets have been distributed to the beneficiaries, the executor should request a Tax Clearance Certificate from Canada Revenue Agency to show that all taxes owing have been paid.

I always advise my clients to consult an accountant to help with tax returns for an estate. While lawyers such as myself know the basics of estate tax returns, we are not qualified to complete the returns, and an executor should enlist the help of an accountant for that. Accountants can also give advice on whether tax owing on income earned by an estate or trust can be shared out among the beneficiaries rather than borne by the trust itself.


  1. Hi Lynne,
    I have a question. A community member has passed on and the will specifies that the residue of the estate be divided among non-profit groups in the community. The amount of the "gift" was disclosed in the early stages. The lawyer/executor then contacts the beneficiaries stating that a substantial amount of income has been earned and he would like to issue T3s to reduce the tax liability. The questions are
    1) Should the T3 amount separate from the gift amount that was originally disclosed?
    2) If a T3 was issued should there be a separate disbursement for that amount?
    3) When the disbursement was made a partial release was signed but no accounting documents were presented, if this proper procedure?
    4) The request for a donation receipt was made upon receipt of the cheque, however there is still a T3 for which no additional monies has been received.
    5) When is it appropriate to ask for accounting records?

    1. I am totally agree with you. All of your questions is also comes to my mind. I'm also hoping for the answers about tax return.

    2. I missed this comment the first time around, so thanks Brittany for posting on the thread and bringing it back up. There is no need for the gifted funds and the share of the earned money to be physically separate disbursements. As long as it's clear on paper how much of the funds received were earned, that's the important part.

      Questions 3 and 5 may be answered together. There needs to be at least one set of accounts provided to the beneficiaries. When there is an interim distribution (i.e. some of the estate funds are paid out, but not all), whether or not that's the right time to provide the accounting depends on how much of the estate is paid at the time. If only a small fraction of the estate is paid out, there is likely no need for an accounting. If, however, the bulk of the estate is being paid out, which is usually the case with an interim distribution, it's normal procedure to provide an accounting at that time. The point of the release is to give approval of the executor's actions with the estate, and it makes no sense to give approval when you don't actually know what the executor has done.


  2. Lynne,
    I filed for my 2015 tax return and found out that a T3 needed to be filed. I don't know from where or who this came from and I need to find out. How and who do I contact to get the details in this T3? Ron B.

    1. The T3 is a return for an estate or trust, and not for you personally. Are you the executor of an estate, or a trustee for a trust of any kind?

      I don't know what you mean by you're not sure where "this" came from. What is the "this" you are referring to? Is it a notice from Canada Revenue Agency?

      The best thing for you to do is hire an accountant who knows about taxes. He or she will know whether you need to file the return, and if so, will be able to do that for you. If you have received some kind of notice, they can no doubt advise you about it as well.

      If you want to, you can call Canada Revenue Agency for more information.


  3. How long does it take to do Estate Tax returns if you hire an accountant. All paperwork has been turned in, does it take weeks or months for them to complete?

  4. I suppose to some extent it will depend on how busy the account is. But months? No, I cannot see why it would take that long. If it does, they don't have a good grip on their workload and you should probably find someone else. I would expect a couple of weeks.



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