Use the Spousal Rollover

When assets transfer to a surviving spouse on death, ITA subsection 70(6) allows a tax-free rollover at adjusted cost base instead of fair market value. Proper estate tax planning ensures this election is applied correctly on the T3 return, deferring capital gains tax until the surviving spouse eventually disposes of the assets.

Elect a Testamentary Trust Year-End

A graduated rate estate can choose a non-calendar fiscal year-end for the first 36 months after death. This estate tax planning strategy lets you defer reporting investment and rental income earned after the date of death, pushing taxable amounts into a later T3 filing period and delaying the tax bill.

Access Graduated Tax Rates

For the first 36 months, a graduated rate estate pays tax at progressive personal rates instead of the top marginal rate. This estate tax planning benefit can save thousands on T3 trust income — but only if the estate qualifies and the T3 return designates the estate as a GRE within the CRA deadline.

Allocate Income to Beneficiaries

Trust income allocated to beneficiaries under ITA subsection 104(13.4) is taxed at their personal marginal rates, not the trust's flat top rate of 53.53% in Ontario. Your estate tax planning should maximize distributions reported on T3 slips to beneficiaries in lower tax brackets each year.

File the T3 on Time

The T3 trust return is due 90 days after the trust's fiscal year-end. Late estate tax filing triggers a 5% penalty on unpaid tax plus 1% per month for up to 12 months. Late T3 slips to beneficiaries also attract $25 per day per slip. Timely filing under your estate tax plan avoids both penalties entirely.

Plan Capital Gains on Death

CRA deems all capital property disposed at fair market value on the date of death. Without estate tax planning, the resulting capital gain on the final T1 and T3 returns can be substantial. Strategies like charitable donation credits, capital loss carrybacks, and the principal residence exemption reduce this deemed disposition tax.

Establish an Inter Vivos Trust

Creating a family trust during your lifetime as part of estate tax planning allows you to transfer future growth of business shares or investment assets to beneficiaries while you retain control. Income earned inside the trust is reported on the annual T3 return and can be split among family members at lower rates.

Claim the Principal Residence Exemption

The principal residence exemption eliminates capital gains on your home, but it must be properly designated on the deceased's final T1 return or the estate's T3 return. Missing this designation in your estate tax plan means CRA taxes the full gain — an irreversible and costly error on properties that appreciated significantly.

Coordinate Final T1 and T3 Returns

Income earned before death goes on the final T1 return; income earned after death goes on the T3 estate return. Proper estate tax planning splits income between these two returns to use personal credits, graduated rates, and deductions on both filings — reducing the combined tax bill across the two returns.

Reserve for Estate Tax Obligations

Your estate tax plan should direct the executor to hold back sufficient funds before distributing assets to beneficiaries. If the estate distributes everything and a CRA reassessment arrives, the executor becomes personally liable for unpaid trust tax. A properly calculated tax reserve on the T3 return protects against this risk.