Filing an Estate Tax Return (T3) – A Complete Guide by a Montreal CPA Firm Near You

Introduction

When someone dies in Canada, their estate often continues to earn income—through bank interest, dividends, rental properties, business operations, or the sale of assets. Because an estate is treated as a trust, it becomes its own taxpayer and may require a T3 Estate Income Tax and Information Return. Executors are legally responsible for filing this return, paying taxes from estate funds, and ensuring that CRA is satisfied before distributing assets. Understanding when a T3 is required, how to file it, and how to qualify for Graduated Rate Estate (GRE) status is essential to avoid penalties and protect the executor from personal liability.

Legal and Regulatory Framework

The T3 return is governed by sections 104–108 of the Income Tax Act and the Trust Income Tax and Information Return requirements. A T3 return must be filed when the estate earns income after death, distributes capital, sells property, holds investments, or remains open beyond a short administrative period. Most estates qualify as a Graduated Rate Estate (GRE) for the first 36 months after death, allowing them to use graduated individual tax rates instead of the top marginal rate. After 36 months, estates are taxed at the highest marginal rate. The executor must obtain a trust account number from CRA before filing.

Key Court Decisions

In The Estate of Jean-Paul Piché v. Canada, CRA successfully reassessed an estate that failed to file a T3 return despite earning post-death income. In Somerville Estate v. Canada, the court ruled that improper allocation of income between the final T1 and the T3 led to penalties. In Barton Estate v. Canada, CRA denied GRE status because the executor failed to designate the estate properly. These cases demonstrate the importance of timely and accurate T3 filings.

When a T3 Return Is Required

A T3 return is required when the estate: earns interest, dividends, rental income, or capital gains after death; holds property for more than a brief period; continues business operations; pays ongoing expenses; distributes capital to beneficiaries; or opens an estate bank/investment account. If the estate is settled quickly and earns no income, a T3 return may not be necessary. Most estates, however, generate some form of income (e.g., bank interest), triggering the need for a T3.

Graduated Rate Estate (GRE)

A GRE is an estate that: designates itself as a GRE on its first T3 return; arose on and as a consequence of an individual’s death; and has only one GRE designation per deceased person. Benefits include: access to graduated tax rates for 36 months, ability to carry back capital losses to the deceased’s final return, special planning opportunities for estate freezes, and preferential treatment in certain anti-avoidance rules. After 36 months, the estate is taxed at the top marginal rate.

Income Types on a T3 Return

The estate may report: interest income; dividend income; rental and business income; capital gains from selling property; trust or partnership income; and foreign income. The estate may allocate or “flow through” income to beneficiaries if distributions are made, shifting the tax burden to those beneficiaries through T3 slips. If income is retained in the estate, it's taxed at estate tax rates (graduated or top rate depending on GRE status).

Executor Responsibilities

Executors must: obtain an estate trust account number; keep detailed accounting records; file the deceased’s final T1 return; file the T3 return(s); distribute estate income correctly; issue T3 slips to beneficiaries; pay all taxes from the estate; and request a Clearance Certificate to avoid personal liability. Executors are legally responsible for unpaid taxes—even if funds were already distributed to heirs.

Common Deductions and Credits

Estates may deduct: accounting fees; legal fees; investment management fees; interest and bank charges; carrying costs of estate properties; capital losses; and certain administrative expenses. Estates may also qualify for foreign tax credits when foreign tax is paid. Proper categorization ensures accurate tax results and audit protection.

When the Estate Ends

An estate ends once all assets have been sold or transferred, debts paid, taxes settled, and remaining funds distributed. The executor must request a CRA Clearance Certificate before closing the estate to ensure all taxes are paid. Not obtaining a clearance certificate exposes the executor to personal financial liability for unpaid tax.

Mackisen Strategy

At Mackisen CPA Montreal, we assist executors with all estate tax obligations. We obtain trust account numbers, prepare all T3 filings, determine GRE eligibility, optimize income allocation, prepare T3 slips, reconstruct financial records, coordinate with lawyers and beneficiaries, calculate capital gains on property sales, and secure Clearance Certificates. Our work ensures compliance, minimizes tax, and protects executors from legal risk.

Real Client Experience

A Montreal estate holding multiple bank accounts and investments required three years of T3 filings; we ensured graduated tax rates and minimized total tax. A family cottage estate generated large capital gains; we allocated gains to beneficiaries to lower overall tax. An executor facing penalties for missing T3 filings avoided reassessment after we filed retroactive returns and documented delays. A complex estate with business income required ongoing T3 reporting until liquidation; we maintained compliance and secured a safe estate closure.

Common Questions

Do all estates need a T3? No—but most estates earning income do. Can beneficiaries be taxed instead of the estate? Yes—through income allocation. Is GRE automatic? No—the estate must designate GRE status. What happens if the estate lasts longer than 36 months? It is taxed at the top rate. Do executors need a clearance certificate? Yes—before distributing assets.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal guides executors through estate tax compliance with precision, strategy, and care. Whether your estate is simple or complex, we ensure full compliance, optimal tax outcomes, and complete peace of mind.