T3 (Trust Income Tax and Information Return)

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T3 (Trust Income Tax and Information Return)

Post by yyzvoyageur »

Must a T3 be completed for an estate in every case? If the estate was small and everything went to the sole beneficiary, is it still necessary to complete a trust income tax return for the estate?

Along those same lines, I understand that the CPP death benefit can be claimed by the estate. Could that alone make it worthwhile to complete a return for the estate if the beneficiary has high income (tax savings)?

Finally, is software like Turbotax able to handle such tax returns?
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DavidR
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Re: T3 (Trust Income Tax and Information Return)

Post by DavidR »

From the CRA's T3 Trust Guide http://www.cra-arc.gc.ca/E/pub/tg/t4013/t4013-10e.pdf

Tax tip
You may not have to file a return if the estate is
distributed immediately after the person dies, or if the
estate did not earn income before the distribution.
In these cases, you should give each beneficiary a
statement showing his or her share of the estate.
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Re: T3 (Trust Income Tax and Information Return)

Post by Norbert Schlenker »

Absolutely worthwhile filing a T3 if it lets a sole beneficiary avoid high marginal taxes on the amount.

No consumer level tax software will handle a T3. It's not that complicated, just laid out differently than a T1. Do it by hand.
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Re: T3 (Trust Income Tax and Information Return)

Post by OhGreatGuru »

The CPP Death Benefit is unfortunately considered as income received by the estate, which is another reason why you have to file a T3 return. The executor should receive a a T4A(P) in Jan/Feb for this. (A bloody nuisance frankly, as for a deceased person of simple means this may be the only taxable income to the estate. But at least it will be taxed at a low rate that way, and not in the hands of a beneficiary. But it delays final settlement of the estate, because CRA is very slow to deal with estate returns.) One of the executor's final steps should be applying for a Clearance Certificate, which you can't do if there is an outstanding T3 to be filed.

a) For the pittance that is involved in the CPP death benefit, I don't know why they insist on taxing it - talk about taxing your widows and orphans.
b) Considering that its purpose is to facilitate a decent burial, and considering the cost of funeral services these days, I don't understand why they don't simply allow the family to sign it over to the funeral home, and have it bypass the estate.
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Re: T3 (Trust Income Tax and Information Return)

Post by izzy »

OhGreatGuru wrote:The CPP Death Benefit is unfortunately considered as income received by the estate, which is another reason why you have to file a T3 return. The executor should receive a a T4A(P) in Jan/Feb for this. (A bloody nuisance frankly, as for a deceased person of simple means this may be the only taxable income to the estate. But at least it will be taxed at a low rate that way, and not in the hands of a beneficiary. But it delays final settlement of the estate, because CRA is very slow to deal with estate returns.) One of the executor's final steps should be applying for a Clearance Certificate, which you can't do if there is an outstanding T3 to be filed.

a) For the pittance that is involved in the CPP death benefit, I don't know why they insist on taxing it - talk about taxing your widows and orphans.
b) Considering that its purpose is to facilitate a decent burial, and considering the cost of funeral services these days, I don't understand why they don't simply allow the family to sign it over to the funeral home, and have it bypass the estate.
and
c) The costs of administration could easily exceed the potential revenue-not that such considerations are generally taken into account when setting tax policy,or so it often seems!
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Re: T3 (Trust Income Tax and Information Return)

Post by DavidR »

OhGreatGuru wrote:The CPP Death Benefit is unfortunately considered as income received by the estate, which is another reason why you have to file a T3 return.
CRA has a long standing practice of letting the person who received the death benefit report the amount (and other income of the estate too, such as interest on cash balances held while the estate is being administered) on their T1 so that no T3 is required.
Of course you can still choose to do a T3 if you want to do one.
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Re: T3 (Trust Income Tax and Information Return)

Post by yyzvoyageur »

So I'm working through the T3RET form now. So far, so good, but a couple of questions:

1. I've claimed only the $2500 CPP death benefit as income in the trust. No other income was claimed on the T3RET. Since the sole beneficiary was the spouse, everything was effectively handed over to the beneficiary right away. Any other income (interest, dividends, etc.) will be claimed on the deceased's final T1, and, for amounts incurred after the date of death, on the T1 of the survivor. Any problems there?

2. Do I have to complete schedule 9 (Income Allocations and Designations to Beneficiaries) and/or do I have to complete a T3 tax slip to show where the $2500 ended up? I'm a bit confused on this point. As far as CRA would be concerned, there is now $2500 (minus $501.25 in taxes) in this trust. I've indicated a trust wind-up date of 2012-12-31, but do I have to somehow show what happened to this money after the trust ended?
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Re: T3 (Trust Income Tax and Information Return)

Post by DavidR »

How much tax would the beneficiary pay if you put the $2500 on his/her return? (CRA has a long standing practice of....)

Then you'd have no T3 to file, and no wind-up date to worry about...
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Re: T3 (Trust Income Tax and Information Return)

Post by yyzvoyageur »

DavidR wrote:How much tax would the beneficiary pay if you put the $2500 on his/her return? (CRA has a long standing practice of....)

Then you'd have no T3 to file, and no wind-up date to worry about...
Tax payable on the T3 is $501.25. If taxed at the beneficiary's marginal rate, it's more like $825. Plus, there'd be a loss of $375 in the form of OAS repayment. It's nearly $700 in total that'll be saved.
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Re: T3 (Trust Income Tax and Information Return)

Post by DavidR »

yyzvoyageur wrote:So I'm working through the T3RET form now. So far, so good, but a couple of questions:

2. Do I have to complete schedule 9 (Income Allocations and Designations to Beneficiaries) and/or do I have to complete a T3 tax slip to show where the $2500 ended up? I'm a bit confused on this point. As far as CRA would be concerned, there is now $2500 (minus $501.25 in taxes) in this trust. I've indicated a trust wind-up date of 2012-12-31, but do I have to somehow show what happened to this money after the trust ended?
A T3 slip is only required if you are allocating income. If the trust is paying tax on the $2500 then it is not allocating income. The $1,998.75 left over is not taxable a second time. The trust can give it to the beneficiary. :)
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Re: T3 (Trust Income Tax and Information Return)

Post by AltaRed »

Resurrecting an old thread in anticipation of filing a 70(1) Final Return, a 70(2) Rights and Things Return and a T3 Trust return for my mother in the months to come.

I am planning on a Rights and Things return since my mother died early in the month prior to receiving her CPP and OAS payments. Hence those two payments can be declared on the 70(2) return and not attract tax.... i.e. her 'new' personal deduction takes care of that.

My main question is on liquidation of the TFSA from which the net proceeds have been distributed to the beneficiaries. I am aware income earned by the TFSA after death and before distribution is taxable in the hands of beneficiaries. It is assumed by me, but not clear reading CRA documentation so far, whether the brokerage account closing fee is an investment/administrative expense to the estate (in the T3 Trust return) OR can/should/must be passed through as an investment expense to the beneficiaries. It would offset the majority of the income earned before distribution. David or others :?:
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Re: T3 (Trust Income Tax and Information Return)

Post by kcowan »

IANAL nor accountant, but I would claim it on your Mom's form. Why? Because her death incurred the expense, and it should be settled and paid before the distribution of remaining funds (and paying tax from the estate on the subsequent earnings). Passing it along is only possible as a consideration because the bank was so inefficient at making the charge in a timely fashion.

Plus it is new territory for the CRA and all the accountants, so anyone can establish policy at this point. Let's call it the AR rule!
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Re: T3 (Trust Income Tax and Information Return)

Post by amphitryon »

Sorry to ''warm this up again'', but I am running into similar questions. Here is the scenario:

Taxpayer died March 2016. Two beneficiaries (son and daughter),lawyer handled the estate and proceeds were paid out to both beneficiaries once all was cleared. Estate was simple - cash in bank and proceeds from a condo sale.
I have done taxes for this taxpayer (my mother in law) for the last seven or eight years and have just prepared (not filed yet) the final tax-return for 2016.
Unfortunately some accrued pension from overseas was only deposited into her accounts a few months after death. Total of these pension amounts were 3,567.52, plus we received a T5 for $ 63.08 interest issued to the estate this year. No other ''income'' after death - did not qualify for the ''death benefit''.

Can I simply add all to the final return, or must I split? If I must split, do I use a ''Rights and Things return'' in addition, only for the latter paid amounts or do I need to file a separate T3 Return instead? I have trouble with the T3 form, since it frequently refers to a line number and the guide, but I have not found any guide with corresponding line numbers, and not for lack of searching.

I have a call in to CRA and they will get back within three days, but I would appreciate comments from here as well.
Thanks.
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Re: T3 (Trust Income Tax and Information Return)

Post by AltaRed »

The accrued pension should go on a 'Rights and Things' return. This is a huge advantage because the 'personal deduction amount' can be used again and no taxes would be payable on the accrued pension amount. Shouldn't take more than 15 minutes to do that tax return. Just be sure to write "Rights and Things' return on the top of the return so it is not confused with the other T1 return.

P.S. If the taxpayer died before the March 2016 OAS and CPP amounts were paid out, those can also be included in the 'Rights and Things' return because they are earned as of March 1, but not paid out until near the end of the month.

The CPAs here may suggest otherwise, but IMO, the T5 needs to be put into a T3 Trust Return and that should be a simple one line entry. Tax will be payable because there are no deductions that I know of for this return.

http://www.cra-arc.gc.ca/E/pub/tg/t4013/README.html doesn't help you?? That guide can be confusing because it covers all sorts of trusts, but the guide does provide guidance on what sections only apply to a testamentary trust. I didn't really have that much trouble with that last year when doing a 2015 T3 for my late mother.

P.S. Why would the lawyer have paid out all of the estate when taxes would still be payable for the 3 tax returns?

Added later: If the 2016 T3 Trust Return form is the same as the 2015 one, you would put the T5 interest on Line 7 of Schedule 8 and then that amount translates over to Line 5 on the Trust Return....which then becomes Taxable Income on Line 56 from which then you use the tax tables to calculate tax owing.
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Re: T3 (Trust Income Tax and Information Return)

Post by amphitryon »

Thanks very much AltaRed.

After studying the various ''offerings'' from CRA, I was getting to think along your lines, and use a ''Rights and Things'' return in addition to the ''T1 last return''. So I will file three returns and thanks to your comments, the T3 should be simple.

The lawyer paid out, since the beneficiaries are my wife and her brother - no problems there, should tax be payable. As it sits, the T1 last return, which I have ready, did not attract any taxes, nor should the second one. And any tax due on the T3, is not an issue.
Thanks again!
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Re: T3 (Trust Income Tax and Information Return)

Post by AltaRed »

Be aware that the Estate Dept of CRA handles all 3 of those returns and they are/were woefully behind in assessing tax returns. It may take several months for them to issue NOAs for all/some of them. A few tips from my experience:

1. Put all 3 returns in the same envelope.
2. If you split out the March 2016 CPP and OAS payment out from the final T1 Return into the 'Rights and Thiings' return, include a letter that shows them how you are splitting the T4(P) and T4(OAS) tax slips.... 2 months for the Final T1 and 1 month into the Rights and Things due to death before payout. Be prepared for them to screw it up though....as they did for my mother. I had to write a letter (May 2016) asking them to re-assess both returns for the right split the way i had sumbitted them... They agreed I was right, but it took until 2 weeks ago :shock: to actually do the re-assessments and re-issue amended NOAs. Gosh....that only took about 9 months (May 2016 to Feb 2017)!!!!
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Re: T3 (Trust Income Tax and Information Return)

Post by rharvey199 »

Hello, sorry if these is questions have already been answered but I'm in the process of filing a final return for 2016 and have some questions regarding the CPP death benefit and filing a T3.

The $2,500 CPP death benefit would be the only amount on a T3 return. I've read through the CRA documents on their website but want to make sure I am correct:
1) i've read I need to apply for a trust number before i can file a T3 return. Is that correct?
2) once I get the trust number and fill out the T3 how do you elect not to pass through the $2500 to a beneficiary so the estate pays the tax? The CRA guide is kind of confusing and I don't want to end up with a T3 and have the $2500 taxed twice?

I know I could put the death benefit through my taxes but I don't mind doing a bit of work to minimize the overall tax bill.

Thanks in advance for your help.
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Re: T3 (Trust Income Tax and Information Return)

Post by AltaRed »

1) You do not need to get a trust number before you file a T3 return. CRA will assign one when they process the return. That is what occurred when I did the T3 for my mother's estate.

2) I think this tells you to put it on Line 19 of the T3 Trust Return
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Re: T3 (Trust Income Tax and Information Return)

Post by rharvey199 »

AltaRed wrote:1) You do not need to get a trust number before you file a T3 return. CRA will assign one when they process the return. That is what occurred when I did the T3 for my mother's estate.

2) I think this tells you to put it on Line 19 of the T3 Trust Return
Thanks AltaRed. Yes, it would go on line 19 of the T3. But when I read through the T3 guide, at the end, there are instructions around filling out a T3 slip for amounts distributed to the beneficiaries. I assume this is when the trust does not pay tax and taxable distributions flow through to the beneficiaries. In this case I want the trust to pay tax on the CPP death benefit instead of myself. If I enter the $2500 death benefit on line 19 and leave the rest of the lines blank I guess I just have to calculate the tax payable on the $2500 and send it in for assessment?

Man are the CRA guides not written in a simple way. No wonder people struggle with this stuff. Thanks for the help!!
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Re: T3 (Trust Income Tax and Information Return)

Post by AltaRed »

The guide is written for every kind of trust, whether $100 billion ETF or mutual fund to a tiny testamentary trust. It is awkward for sure but when one understands it is used for every? kind of trust conceivable, thus the complexity. At least there is some guide of what applies to a testamentary trust.

IF you chose to flow through the income to beneficiaries (rather than pay tax in the trust), you would have to issue T3 tax slips to the beneficiaries so that the income is taxable in the beneficiary's hands (just like an ETF or mutual fund). For small amounts of tax differences between paying tax in the trust, versus flowing the income through, it seems too much hassle to issue T3s. Much simpler to just use Line 19 (in your case) and then fill out the rest of the return....going to the Fed and Prov tax tables to calculate the tax due.

That said, trust taxation changed in 2016 from what used to be the personal tax tables for testamentary trusts...to a system of highest marginal tax rate. Although I believe you can elect to choose a transition period for a hybrid calculation that smoothes the abruptness over a period of time....but that may only apply to existing testamentary trusts and not new ones like you have. You will have to decide whether or not to pay the tax internal to the trust itself, or issue T3s. Warning though.... you have to issue the T3s by the end of March and I believe? file the T3 return by the end of March too if you choose that methodology, whereas you have to the end of April I believe if you pay the tax within the trust itself. I chose to go with paying tax within the trust itself in 2015.
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Re: T3 (Trust Income Tax and Information Return)

Post by rharvey199 »

AltaRed wrote: IF you chose to flow through the income to beneficiaries (rather than pay tax in the trust), you would have to issue T3 tax slips to the beneficiaries so that the income is taxable in the beneficiary's hands (just like an ETF or mutual fund). For small amounts of tax differences between paying tax in the trust, versus flowing the income through, it seems too much hassle to issue T3s. Much simpler to just use Line 19 (in your case) and then fill out the rest of the return....going to the Fed and Prov tax tables to calculate the tax due.

That said, trust taxation changed in 2016 from what used to be the personal tax tables for testamentary trusts...to a system of highest marginal tax rate. Although I believe you can elect to choose a transition period for a hybrid calculation that smoothes the abruptness over a period of time....but that may only apply to existing testamentary trusts and not new ones like you have. You will have to decide whether or not to pay the tax internal to the trust itself, or issue T3s. Warning though.... you have to issue the T3s by the end of March and I believe? file the T3 return by the end of March too if you choose that methodology, whereas you have to the end of April I believe if you pay the tax within the trust itself. I chose to go with paying tax within the trust itself in 2015.
Agreed. The trust/estate will be taxed at a lower rate than I would be as a beneficiary. Thanks again.
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Re: T3 (Trust Income Tax and Information Return)

Post by DavidR »

AltaRed wrote: That said, trust taxation changed in 2016 from what used to be the personal tax tables for testamentary trusts...to a system of highest marginal tax rate.
Likely rharvey's case would qualify as a "Graduated Rate Estate".
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Re: T3 (Trust Income Tax and Information Return)

Post by rharvey199 »

Thanks everyone. I found the federal and provincial tax schedules so I think I'm good. Appreciate the help.
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Re: T3 (Trust Income Tax and Information Return)

Post by amphitryon »

Just to keep anyone interested informed; as I indicated, I did call CRA for advice and have had actually had two return-calls, since the first contact was not qualified to provide answers (as he indicated) to my questions re. T1 final return, T1 70(2) return (Rights & Things) and the T3.

First, thanks to AltaRed, I had the first two returns basically completed, with one exception: I had put the sale of mother's primary residence into the T1, but was advised to put it through the T3, since the sale was executed by the estate. The net difference is nil of course, but needed a few more schedules for the T3, even though they all end up with zero (or negative, since the sale attracted some costs: lawyer and fees).
Interesting is, that even so, the T1 return also needed the Schedule 3 included, just to say the property was her principal residence for all her time here. I don't quite understand this, but will include it. They can pick what the want.

One other point, the T3 should go to an address in Ottawa, the ''Ottawa Technology Center''. Now I'm curious what will come of it all.

I should also note, had I not brought up the Rights & Things return, all the CRA contacts tried to push me towards T1 final and T3 returns only. Only when I raised the Rights & Things return, they agreed, after putting me on hold and checking somewhere, that I could use it as well, thus splitting income to ''before'' and ''after'' and taking advantage of all deductions/credits again. I'm glad I had found references to this type of ''second return'' here on the Forum initially, and had read up on it, because on the T3 there are none of the personal exemptions/credits available. Thanks.
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Re: T3 (Trust Income Tax and Information Return)

Post by AltaRed »

For some reason, Rights and Things returns seem not to be that popular for individuals with simple estates, perhaps because it is mostly one month of CPP and OAS and if an executor has an accountant prepare that return.... the costs outweigh the tax savings. C'est la vie.

That (and the Final T1) were the ones CRA messed up for my mother's estate. Firstly, they did get the NOA correct for the Rights and Things, but then double counted the last month CPP and OAS on the Final T1...despite me putting a letter with each of the two returns explaining the split from the T4A tax slips. :roll: Eventually that all got straightened out.

Yes, the T3 Trust Return is supposed to go elsewhere....but somehow the CRA's Estate Department seems to be involved in all the returns....so go figure. Only they know (or don't know) what they are doing.

Also, I suppose you know that if the T3 trust return has capital losses, you can make an election (with a letter) requesting that those losses be carried back to the Final T1 return to offset cap gains there. I am still waiting almost a year later for that election to be assessed on the Final T1...with a corresponding (small) tax refund to the estate.
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