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.