Trust and Estates Returns (T3)

An estate is a form of trust. A trust allows the trustee to give income to one person and capital to another. Distribution of capital can be delayed for a length of time. A Trust may be created while alive (inter-vivo) or in a will (testamentary). The most obvious use of a testamentary trust would be to provide for young children in the event that both parents die. The estate could be left in trust and administered by a trustee until the children reach a certain age. Income from the trust is used to support the children until they reach the appropriate age.

An inter-vivo trust is often used to split income, or to shift income to someone in a lower tax bracket (spouse or child).

The person who establishes trust is called "settler" and in the case of estate is "testator". The beneficiaries are those who will receive income and capital from the trust. Professional tax preparers at Alfa Tax can help you with your T3 estate and trust returns.

Frequently Asked Questions

Question: My father passed away this year. Can I deduct funeral expenses on the tax return?

Answer: No, the funeral expenses are considered personal expenses.

Question: I received CPP death benefit of $2,500 when my mother died. Is CPP death benefit taxable? Who should declare them?

Answer: CPP death benefits are taxable. The recipient or estate has to declare CPP death benefit on the tax return. If the recipient is in a higher tax bracket it may be beneficial to file T3 trust return and $2,500 can not be declared on the mother's tax return.

Question: What is the difference between CPP death benefit and employer death benefit? Is life insurance taxable?

Answer: CPP death benefits are received only if the deceased contributed to Canada Pension Plan (CPP). CPP death benefits are fully taxable. Employer death benefits are also taxable but the first $10,000 of death benefits received from employer is tax-free. Life insurance is tax free as long as the premiums were paid out after the tax dollars.

Question: My husband died this year. He had substantial amount of money in RRSP. I am in higher tax bracket. How can I avoid paying tax on RRSP?

Answer: You can directly transfer the value of his RRSP to your RRSP or RRIF plan, If you are the beneficiary of RRSP. This option is available if you are spouse of the deceased.

Question: Who should report investment income earned after death?

Answer: Income earned after death is taxed in trust until it is distributed to beneficiaries. Income from trust can be distributed to beneficiaries of the estate and taxed in their hands. Beneficiaries can choose to pay taxes in the trust or on their personal tax returns on investment income.

Question: I am single mother with a 5 year old daughter. I want to ensure that my daughter is looked after if I was to die.

Answer: You should have an updated will and appoint a guardian for your daughter's custody upon your death. You may choose to set up a trust where your daughter is the beneficiary. The trust may hold assets which will be distributed to your daughter when she reaches a legal age. You should consult professional advice regarding your will and trust arrangements.