I am preparing three T3 trust returns for 2018, 2019 and 2020 for an executor whose mother died in June 2018. She was living in her home, her principal residence when she died. The only estate income in 2018 was the CPP death benefit. There was no estate income in 2019. The only estate income for 2020 was a capital gain from the sale of the house. The house was the principal residence of the deceased at date of death. The proceeds for the sale of the house have already been distributed by the executor (less an estimated amount for the payment of taxes owed on the capital gain) in equal shares to the three beneficiaries. The executor is one of the beneficiaries.
Does the estate claim the capital gain and pay the taxes owing on the 2020 return or does the estate issue three T3 slips showing each beneficiaries share and as a result show a taxable income of zero on the 2020 T3 trust return? Can the executor choose which way he wants to handle this or is there anything under the ITA forcing him to issue T3 slips to each of the beneficiaries?
“I am preparing three T3 trust returns for 2018, 2019 and 2020 for an executor whose mother died in June 2018.”
"The proceeds for the sale of the house have already been distributed by the executor "
You also saw this discussion re late GRE at
Late filing of graduated rate estate trust designation ?
See T4013 to see what may apply to this trust.
I am not sure why he has done nothing since his mother’s death in June 2018.
And I am not sure why he distributed the bulk of the proceeds to the beneficiaries without a clearance certificate.
But it is what it is.
The beneficiaries are the executor’s two siblings. There was nothing else in the estate and perhaps he figured it was safe to distribute the bulk of the proceeds without a clearance certificate. He has retained an amount in the estate to pay the taxes on the capital gain from the home’s sale. This is the only income of the estate in 2020.
It has not been 36 months since the date of death.
The full details of the case were all outlined in my previous post with my questions. Any suggestions anyone can provide is much appreciated.
The Estate does not have use a December 31 year-end. Since the mother died in June 2018 then the first estate year can end in June 2019. I would send that in as soon as possible reporting the Estate as a GRE (let CRA decide if they will not accept the GRE designation instead of volunteering for higher tax). Using a June year-end may decrease some late filing penalties or arrears interest in one of the years.
The Estate executor can choose to have the tax paid by the Estate. You may want to have the Executor check with the beneficiaries to see what their tax rates are but I imagine they would prefer to have the Estate pay the tax (at presumably a lower tax rate). The beneficiaries may have to agree to contribute their share of the Estate’s tax on the house gain. If they don’t agree to that, the other option is to allocate their share of the gain on a T3, likely resulting in higher tax for them.
Thanks so much Kevin for your comments about this file.
I did receive this comment from someone else (not on this forum):
“Since the house was sold by the estate, the estate has to report the disposition and the gain must be allocated to the beneficiaries and taxed on their returns. You could use subsection 104 (13.2) bracket to tax the gain in the estate, but only if the estate has a non-capital loss or net capital loss carry forward greater than the taxable capital game for that year”.
In this case there was no losses in the estate so it sounds like, from what this person is saying, that the executor is not allowed to have the estate pay the taxes on the 2020 T3 and instead the gain must be reported on the beneficiaries returns using T3’s generated by the estate. But in this case the total tax payable would be less if the estate claimed the capital gains income since it would be considerably less than the marginal tax rates of the individual beneficiaries. The only income in the estate for 2020 is this net capital gain of about $40,000.
Kevin could you please comment on this opinion that the executor must issue T3’s instead of paying the taxes through the estate?
If anyone else wants to weigh in please feel free.
I am not aware of any requirement to allocate a gain from the sale of a property, and a former principal residence specifically, to the beneficiaries.
I assume it was the Estate that sold the property as opposed to the beneficiaries. The second one would create a timing issue.
As noted before, this executor has made it non-standard by (1) delaying and (2) paying the beneficiaries in advance.
By doing so, this executor has likely not followed the instructions in the Will precisely, but we on the public internet do not know exactly what the Will says.
All of the correct reporting treatment is given in the previous reference (Guide T4013).
Since the full text of the deceased’s Will has not been posted on this forum, nor the full transaction list of the activities of the estate, it is not possible to give precise correct answers here.
I would echo Kevin’s statement:
“Since the mother died in June 2018 then the first estate year can end in June 2019. I would send that in as soon as possible reporting the Estate as a GRE”
Thanks Kevin. I checked with a CRA agent who works with T3 trust returns and he indicated that estate is perfectly entitled to choose to claim the capital gain income on the T3 2020 trust return especially since the beneficiaries all have high marginal tax rates.
You may also want to consider Minimum Tax as the estate has no other income except for the capital gain. If it’s only $40k, the basic exemption should cover it all and it won’t matter but just a point to consider.
I’m not normally apt to rely on the answers from CRA phone agents but I’ve prepared and filed T3’s over the years where the estate has sold a house after the date of death. Some have even been reviewed at the clearance certificate level. I’ve never had CRA suggest that the post-death gain has to be allocated to the beneficiaries.