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Executor Beware: 2025 CRA Estate Audit Trends You Should Know

Executor Beware 2025 CRA Estate Audit Trends You Should Know

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The landscape of Canadian estate planning is evolving. When blended families and second marriages come into play, the risk of disputes over Wills, trusts, and estates can skyrocket. At Forum Estates LLP (forumestates.ca), we believe clarity today prevents conflict tomorrow. Here’s what you need to know. 

The Canada Revenue Agency (CRA) looms large, ready to scrutinize every detail. In 2025, estate audits are becoming more intricate, especially with evolving trust reporting rules and shifting capital gains regulations.  

At Forum Estates LLP, we’ve seen firsthand how executors can be caught off-guard by the CRA’s heightened focus.

This blog, crafted with insights from our team at ForumEstates.ca, dives into the latest CRA estate audit trends, backed by research, legal references, and practical advice to keep you ahead of the curve.

The Weight of the Executor's Role

Being an executor is no small feat. You’re not just managing assets; you’re navigating a labyrinth of legal and tax obligations. The CRA’s Income Tax Audit Manual (Chapter 17) emphasizes that executors are legally responsible for the estate’s tax compliance, including reporting all income and capital gains accurately.

Missteps can lead to personal liability, penalties, or even audits stretching back years. 

For executors in 2025, the intersection of these truths is where the real challenge lies. 

Capital Gains Inclusion Rate: A Constant Shift

One of the most significant developments for 2025 is the deferral of the proposed capital gains inclusion rate increase. Initially announced in the 2024 federal budget, the plan to raise the inclusion rate from 50% to 66.67% for capital gains exceeding $250,000 annually for individuals (and all gains for corporations and most trusts) was set to take effect on June 25, 2024.

However, on January 31, 2025, the Department of Finance reported that it was changing the effective date to January 1, 2026, due to a continuing lack of legislative certainty in a politically uncertain environment (including the prorogation of Parliament and an expected 2025 election). It implies that the inclusion rate will continue at 50 % in 2024 and 2025 on all capital gains, with the exception of the exemption.

This deferral has both advantages and disadvantages for the executors. On the one hand, it will make 2024 reporting easy since estates will be allowed to keep the current rates with 50% inclusions.

Conversely, the CRA is continuing the reporting of disposition prior to June 24, 2024, and after this date (Period 1 and Period 2) to match the tax slips, which have already been issued.

This requires meticulous record-keeping to ensure compliance, especially for estates with significant capital dispositions. The CRA has also extended relief from late-filing penalties and arrears interest until June 2, 2025, for T1 individual filers and May 1, 2025, for T3 trust filers, giving executors some breathing room. 

According to the CRA, the proposed increase to the Lifetime Capital Gains Exemption (LCGE) to $1.25 million for qualified small business corporation shares (QSBCS) and qualified farm or fishing property (QFFP) took effect on June 25, 2024, and remains unchanged despite the inclusion rate deferral.

Enhanced Trust Reporting Rules: No Room for Oversight

Trusts are a cornerstone of estate planning, offering flexibility and asset protection. However, the CRA’s enhanced trust reporting rules, effective for tax years ending on or after December 31, 2023, have tightened the noose.

These rules require most trusts, including testamentary and inter vivos trusts, to file a T3 return and Schedule 15 (Beneficial Ownership Information) within 90 days of the trust’s tax year-end, typically March 31, 2025, for trusts with a December 31 year-end. The CRA also requires specific details about the names of trustees, addresses and taxpayer identification numbers of the beneficiaries, as well as those who can influence the decisions made on the trust.

Relief for Bare Trusts

The bare trusts have a silver lining. The CRA released a notice in October 2024 to say that any CRA non-gratuitous bare trusts are automatically not required to file a 2024-year T3 and Schedule 15, which must be requested specifically. This is an extension of the relief given to 2023, as the bare trusts are complex to detect, and the trustee has no meaningful control over the assets to have legal title to them.

However, executors must remain vigilant, as the CRA may request filings during an audit, and gross negligence penalties could apply in egregious cases. 

 ”Trusts have been a staple in tax and estate planning, providing flexibility, control, and asset protection,” notes a 2025 MNP report. However, the new reporting requirements are primarily intended to increase transparency regarding beneficial ownership. 

CRA Audit Trends: What's on the Radar?

The CRA’s audit focus in 2025 is sharper than ever, driven by data analytics and a push for compliance. According to a 2022 update to the Income Tax Audit Manual, estate audits often zero in on the following:

  • Deemed Dispositions: Upon death, the Income Tax Act (ITA) Section 70(5) deems most capital property to be disposed of at fair market value (FMV), triggering potential capital gains. Executors should make proper evaluations since a mismatch may cause a reassessment.
  • Income Allocation: The CRA examines the mode of allocation of the estate income to the beneficiaries of the year of the executor. Errors in reporting can result in double taxation or penalties.
  • Rollover Provisions: Property transferred to a spouse or spousal trust under ITA Section 73(1) can defer capital gains, but executors must file elections correctly to avoid audit flags.
  • Trust Compliance: The CRA is cracking down on trusts failing to file T3 returns or Schedule 15, with penalties for non-compliance starting at $25 per day, up to $2,500, plus potential gross negligence penalties.

The CRA’s taxpayer relief provisions allow refunds or reductions for individuals and graduated rate estates (GREs) within a 10-year period, but testamentary trusts only benefit for tax years ending on or before December 31, 2015.

This limits relief options for older trusts under audit. 

Navigating the Audit Minefield

Audits can feel like a storm on the horizon, but preparation is your best defence. Here’s how executors can stay ahead:

  • Employ Technology: The digital options available through the CRA, including My Account and My Business Account, will be improved in the year 2025 by having a more efficient navigation system and the possibility to get notifications via email. Track filings and the notices given, and respond by using these.
  • Record Keeping: Document all valuations of assets, dispositions of assets and the distributions and beneficiaries. Considering there is possible suspicion of misrepresentation or fraud, the CRA has the authority to reassess returns under the ITA Section 152(4).
  • Consult the Professionals: Forum Estates LLP is a tax compliance and estate planning firm. You can be sure of peace of mind as our team will help you sail through the maze of filings and responses to audits. Look at ForumEstates.ca to get custom assistance.

In the book Taxation of Trusts and Estates in Canada (2023), authors Larry Frost and Lisa Marcuzzi emphasize, “Executors must approach tax compliance with the same diligence as asset management, as the CRA’s audit process is increasingly data-driven and unforgiving.”

This underscores the need for proactive planning. 

The Political Wildcard

A delay in the increase of the capital gains inclusion rate to 50 percent is an indicator of the unstable political environment in Canada in 2025. The proposed changes could never see the light of day as statements on the floor of the House on March 23, 2025, Parliament has been prorogued until March 24, 2025, and an election lurks around the next corner.

The Canadian Federation of Independent Business (CFIB) noted, “This will be welcome news to many small business owners who were facing higher taxes from a tax change that was proceeding  despite the lack of any legislation from Parliament.” 

Executors must stay informed, as a new government could scrap or amend these proposals, impacting estate planning strategies.

Final Thought

Being an executor, you are not simply winding down an estate; you are preserving more of a legacy. The audit trends depicted by CRA in 2025 require accuracy, including reporting of capital gain and compliance with trusts. At Forum Estates LLP, we would be happy to take you through the maze. It may be in the correct filing of T3 or just planning the possible audit, but we are the experts, and you can be at an advantage.  

Get in touch with our team by visiting ForumEstates.ca in order to assume control over your estate responsibilities.

This government’s enforcement of proposed legislation without the approval of Parliament is dangerous and is a warning (according to Kim Moody, a tax expert) to set a bad precedent as the CRA is doing.  

Be alert, be ready and have Forum Estates LLP take the road to the tax world of 2025 with you. 

References:

  • Canada Revenue Agency. (2025). Update on the Canada Revenue Agency's administration of the proposed capital gains taxation changes.
  • Canada Revenue Agency. (2025). T3 Trust Guide – 2024.
  • Canada Revenue Agency. (2022). Income Tax Audit Manual, Chapter 17.
  • Frost, L., & Marcuzzi, L. (2023). Taxation of Trusts and Estates in Canada. Toronto: Thomson Reuters.