CRA confirms that its executor’s year policy is relevant only where the executor’s year extends beyond the GRE’s taxation year

After referring to the common-law concept of the executor’s year, IT-286R2, para. 6 states:

In spite of such common law rules, where the initial taxation year of a testamentary trust coincides with the executor's year and where the sole reason for the rights of a beneficiary being unenforceable is the existence of an executor's year, the Department will consider the income of the trust for that year to be payable to the beneficiary or beneficiaries of the trust pursuant to subsection 104(24). However, if even one beneficiary of the trust objects to this treatment with respect to the executor's year, the income of the trust for that year, to the extent that it was not actually disbursed during that year, will be taxed in the hands of the trust. In any case where the trust has been wound-up and the final T-3 return is filed for a period which terminates before the end of the executor's year, the income of the trust (including taxable capital gains) earned for that period is considered to have been paid to the beneficiaries of the trust in the calendar year in which that period ends, except for any part of the trust's income that was disbursed by the trustee to persons other than beneficiaries pursuant to the deceased's will or the operation of law e.g., the will stipulated that debts are to be paid out of income.

CRA elaborated on this position in the context of a graduated rate estate, indicating that:

• This position only applies “where the only reason that an amount of income is not payable to the beneficiaries is that it was earned in the initial 12 months of the estate” and does not apply where the income is not considered by CRA to be payable to the beneficiaries under the terms of the will.
• However, regarding the terms of the will, CRA is prepared to accept that, where the will does not specify which assets the bequests are to be paid from, “the residue of the Estate can include income” so that the income of the estate can be considered to be payable to the beneficiaries for ss. 104(6) and (23) deduction purposes.
• The quoted position allowing income in the executor’s year to be considered as payable to the beneficiaries only if they all so agree applies only where the estate has not been wound up in the executor’s year such that the estate administration continues beyond the first year (otherwise, the income would in fact have been payable in that year).
• The latter point regarding the estate having been wound up “in” the executor’s year, also applies where the end of the estate’s taxation year coincides with end of the executor’s year.

CRA did not say anything about its policy not applying in Quebec.

Neal Armstrong. Summaries of 26 November 2020 STEP Roundtable, Q.1 under s. 104(23) and s. 104(13.3).