Navigating estate returns
Are you an estate executor or a trustee? March 31 is an important T3 income tax return filing deadline for a trust with a Dec. 31 year-end.
Remember there were big changes in tax rules for testamentary trusts in 2016. Tax rates rose dramatically. Calendar yearends became mandatory.
What is a testamentary trust? It’s a trust established according to the terms of a deceased person’s will.
If you are a trustee, does your estate or trust have to pay tax at the flat top-bracket rate of 47.75 per cent (for Saskatchewan)? Or, is it a graduated rate estate (GRE)? The government has a graduated rate estate (GRE) time limit. A GRE can only benefit from low tax brackets for 36 months after the date of death. Basically the date of death determines the tax rate for 2017 estate income. If the date of death was before 2014, the 36 months have already elapsed.
All 2017 estate income is taxable at 47.75 per cent.
If the date of death was during 2014, the big jump in tax brackets to 47.75 per cent occurs at the end of 36 months. Suppose, for example, the death occurred on July 1, 2014. The first six months of estate income in 2017 are taxable using graduated rates, with 25.75 per cent applicable to the first $45,916. The executor should have already filed a GRE tax return for the period ending June 30, 2017. That T3 tax return was due September 28, 2017.
The executor must file two tax returns for 2017. The second 2017 T3 return reporting period runs from July 1 to Dec. 31, 2017.
That second T3 return is due March 31, 2018.
Because the 36-month GRE-period elapsed at the end of June 2017, the reporting period switches to the calendar year.
As well, the income for the July-to-December 2017 T3 return is subject to the flat 47.75-per-cent tax rate if income is taxed in the trust. To avoid that high tax rate, the executor could issue T3 slips to allocate income to the beneficiaries so they pay tax at their own individual graduated rates.
If the estate of the person who died in 2014 has not yet been wound up, T3 returns for 2018 and all subsequent years are subject to the 47.5-per-cent flat tax rate and must report income on a calendar-year basis. If the death occurred Dec. 15, 2015, and the executor chose to use the Dec. 15, 2017 anniversary of death as the year-end, the annual T3 return is due 90 days later, on March 15, 2018.
Generally, for deaths after 2013, the executor has the option to tax income at low-bracket rates in the estate for only 36 months. If the will directs the executor to hold investments in trust for a beneficiary, all 2017 investment income earned by the trust becomes subject to the 47.75-percent flat rate on any income retained by the trust.
However, the trustee can choose to issue T3 slips to allocate trust income to avoid taxation at the highest rate in the trust.
Because all testamentary trusts must report income on a calendar-year basis, the T3 return is due March 31, 2018.
If the beneficiary qualifies for the disability tax credit, the trust can become a qualified disability trust subject to the low-bracket rates, similar to a GRE.
Read the T3 Trust Guide (T4013) published by the Canada Revenue Agency. Note the new mailing addresses for T3 tax returns and T3 tax slips.
Learn about the new option to file electronically.
Terry McBride, a member of Advocis, works with Raymond James Ltd. The views of the author do not necessarily reflect those of Raymond James Ltd. Information is from sources believed reliable but cannot be guaranteed. This is provided for information only. We recommend clients seek independent advice from a professional adviser on tax-related matters. Securities offered through Raymond James Ltd., member of the Canadian Investor Protection Fund. Insurance services offered through Raymond James Financial Planning Ltd., not a member of the Canadian Investor Protection Fund.