CRA Form T3, officially titled the Trust Income Tax and Information Return, is the Canadian federal tax return that must be filed by trustees on behalf of trusts resident in Canada. The T3 is Canada’s equivalent of the U.S. Form 1041 and is governed by Division B, Subdivision k of the Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.)), sections 104 through 108, which establish the comprehensive framework for the taxation of trusts and their beneficiaries in Canada.

A trust is a legal arrangement in which a settlor transfers property to a trustee, who holds and manages that property for the benefit of one or more beneficiaries. For Canadian tax purposes, under ITA s. 104(2), a trust is treated as an individual and is taxed on income it earns but does not distribute to its beneficiaries. The trust acts as a conduit for income flowing to beneficiaries: under ITA s. 104(6), the trust may deduct amounts that become payable to beneficiaries in the year, and those beneficiaries then report the income on their personal T1 returns. The trust issues T3 slips (Statement of Trust Income Allocations and Designations) to each beneficiary detailing the type and amount of income allocated.

The T3 return covers several categories of trusts, each with different tax treatment. Inter vivos trusts, created during the settlor’s lifetime, are generally taxed at the top federal marginal rate (33%) on all income retained within the trust, making income accumulation within such trusts expensive. Testamentary trusts, created by a will upon death, were historically taxed at graduated rates but are now also subject to the flat top rate, with two exceptions: graduated rate estates (GRE) and qualified disability trusts (QDT). These two types of trusts benefit from graduated (progressive) tax rates identical to those available to individuals, which can result in significant tax savings during the estate administration period or for the lifetime of a disabled beneficiary.

A T3 return must be filed by the trustee for any taxation year in which a Canadian-resident trust has tax payable, has realized a taxable capital gain, or has disposed of capital property (ITA s. 150(1)(c)). The T3 must also be filed when the trust allocates income to beneficiaries, even if no tax is payable at the trust level, because T3 slips must be issued to each beneficiary to report their share of the trust’s income.

Common situations requiring a T3 filing include family trusts that hold investment assets and earn interest, dividends, or capital gains; estate trusts administering the assets of a deceased person during the probate and distribution process; alter ego trusts and joint spousal trusts used for estate planning purposes; real estate investment trusts; employee benefit trusts; and charitable remainder trusts. Recent amendments to the Income Tax Act have also expanded the filing obligation to bare trusts, requiring them to file a T3 return even if they have no income, capital gains, or distributions.

The T3 return must be filed within 90 days after the trust’s tax year end. For inter vivos trusts, the year end is always December 31, making the filing deadline March 31. Graduated rate estates may choose a non-calendar year end within 12 months of the deceased’s date of death, and the 90-day filing deadline runs from that chosen year end. Failure to file the T3 return by the deadline results in a late-filing penalty of 5% of unpaid tax plus 1% per month (up to 12 months) and interest at the CRA prescribed rate.

A properly completed T3 Trust Income Tax and Information Return must include several essential components. The trust identification section requires the trust’s legal name, CRA trust account number, type of trust (testamentary, inter vivos, GRE, or QDT), complete address, and tax year end date. The trustee information section requires the trustee’s full legal name, Social Insurance Number (for individual trustees) or business number (for corporate trustees), and mailing address.

The income section must report all sources of trust income by category, including interest, eligible dividends, other-than-eligible dividends, capital gains (of which only 50% is included in income under ITA s. 38), rental income, business income, foreign income, and any other income. Each type of income retains its character when allocated to beneficiaries, which is important for tax credit purposes (for example, eligible dividends allocated to a beneficiary entitle the beneficiary to the enhanced dividend tax credit).

The deductions section reports expenses deductible at the trust level, including trustee fees, legal and accounting fees, interest expenses on money borrowed to earn investment income, and other deductions. The beneficiary allocation section reports the total income made payable to beneficiaries under ITA s. 104(6), the number of beneficiaries, and whether T3 slips have been issued. The tax payable section calculates the tax on income retained in the trust, applying either the flat top marginal rate (for inter vivos trusts) or graduated rates (for GRE and QDT trusts). The trustee must sign the return, certifying that the information is correct and complete. The T3 Guide published by CRA provides detailed instructions for completing each section of the return.