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 comment:

  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?
    Thanks!

    ReplyDelete

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