CRA considers that s. 118.1(5.1), which references a gift made by a GRE, can apply to a gift made by an estate before it has filed its first year’s return and, therefore, before it has satisfied paras. (c) and (d) of the GRE definition.
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|Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(5.1)||estate can make a gift qua GRE before it has filed its first return||244|
An estate is a beneficiary of an inter vivos trust (which, for instance, is in turn the beneficiary of a life insurance policy). Would a payment from that trust to the estate disqualify it as a testamentary trust and, thus, as a graduated rate estate?
CRA noted that the graduated rate estate definition requires that an estate must be a testamentary trust, whose definition requires that no property have been contributed to the trust otherwise than by an individual on or after the individual’s death and as a consequence thereof – so that the property contributed to the estate, as the beneficiary of the inter vivos trust, causes the estate to fail as a GRE.
If the deceased had a second will pertaining to foreign assets, and the domestic executors either do not know about this second will, or cannot deal with the foreign executors on a timely basis, would the status of the estate as a graduated rate estate (“GRE”) be invalidated if only the domestic executors elected for the estate to be a GRE?
CRA reiterated its view that there is only one estate, which encompasses all of the world-wide property of the deceased, and noted that there could be issues as to whether the domestic executors have the ability to make the GRE designation (under para. (d)) and (respecting para. (e)) that the domestic executors would need to ensure that the foreign executors did not purportedly designate their portion of the estate.
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|Tax Topics - Income Tax Act - 101-110 - Section 108 - Subsection 108(1) - Testamentary Trust - Paragraph (b)||estate encompasses world property even if 2nd undisclosed will||52|
A deceased taxpayer’s will provides that the assets’ division into a spousal and children’s trust.
a) If assets held in the general estate were not transferred to the spousal or children trusts for two years while the estate was under administration, would tax returns be required in the interim for all three testamentary trusts?
b) If in the second year following death, all the assets were held in the spousal and children’s trusts, would there no longer be a graduated rate estate?
c) Can assets be transferred from the other testamentary trusts back to the graduated rate estate without offending the anti-stuffing rule in s. 108(1) - “testamentary trust” - (b)?
d) As donations now must be made by the general estate and not the other testamentary trusts, does this mean that the general estate must remain until the donations are made (up to the 60th month)?
(a) CRA generally views trusts arising from estate residues as arising at the time of death. We reiterated that general position in question 2 at last year’s Roundtable. If the spousal or children’s are created and holding assets, the Act would require filing in respect of each of them (subject to the T3 Guide exceptions)..
(b) As (per the definition in s. 248(1)) only an estate can be a “graduated rate estate,” a testamentary trust to which property is transferred from the estate cannot be a GRE. Accordingly, if all the assets are held in the spousal or children’s trust or the trust for children in 2016, there would be no GRE.
(c) Para. (b) of the GRE definition requires that the estate be a testamentary trust as defined in s. 108(1) - and para. (b) of that definition is such that where property is contributed to a trust otherwise than by an individual on or after the individual’s death, and as a consequence thereof, it will not be a testamentary trust. Thus, the asset transfer-back to what would have been the graduated rate estate would cause it to no longer be a GRE.
(d) Although, by definition, a GRE can exist for a maximum of 36 months after death, proposed s. 118.1(5.1) provides that estates which cease to be GREs solely by reason that 36 months have passed since death, can make a donation within 60 months of death. However, all of the other requirements of the GRE definition, must be met, including that the estate arose on or as a consequence of the individual’s death.
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|Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(5.1)||estate must continue to satisfy the other GRE requirements following 36 mos.||129|
|Tax Topics - Income Tax Act - 101-110 - Section 108 - Subsection 108(1) - Testamentary Trust - Paragraph (b)||trusts on estate residue arise on death||88|
Where the will of the deceased creates a spousal testamentary trust which receives a part or all of the deceased's property, can the spousal trust elect to be graduated rate estate? CRA responded (TaxInterpretations translation):
[O]nly an estate can be a graduated rate estate of a deceased taxpayer. Consequently, a trust created by the will of a deceased taxpayer for the benefit of his spouse cannot qualify as a graduated rate estate, irrespective of whether it holds all or part of the property transferred by the estate of the deceased.
18 June 2015 STEP Roundtable Q. 2, 2015-0572091C6 - 2015 STEP Q2 Meaning of Graduated Rate Estates
(see also summary of initial response at 19 June 2015 STEP Roundtable, oral Q.2(a))
If an estate for a deceased who passed away after 2015 is under administration in its first 36 months, will it be considered a graduated rate estate in its entirety, even if there are two wills. At what point does the estate transition into testamentary trusts?
CRA indicated that the deceased has only one estate encompassing all of his or her property wherever it may be situated, and that this is so even if there are multiple wills with different executors. Para. (e) of the graduated rate estate definition in s. 248(1) does not imply the opposite but instead is intended to address the situation where there are different parties (executors, for example) each purporting to make the graduated rate estate designation. CRA stated:
The composition of the graduated rate estate for tax purposes will often depend on how the decedent wanted his/her assets to be administered as dictated by will. Where, for example, a will deals immediately with separating property to be held in a distinct testamentary trust apart from other assets of the estate, there can still only be one graduated rate estate allowed for tax purposes for the 36 month period (or earlier if administration is complete) following death....
Question 8 of the 2012 STEP Roundtable [stated]:
...[T]he estate of the deceased and other trusts funded out of the residue of the estate will generally be testamentary trusts. Traditionally, the CRA has not attributed any tax consequences to the transition from estate administration to trust administration and generally has viewed the trusts created out of the residue as arising on death.
In practice, however, "in circumstances where more than one trust is created out of the residue, a separate T3 trust number is assigned to each trust."
Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Classification of Trusts for Income Tax Purposes", Chapter 2 of Canadian Taxation of Trusts (Canadian Tax Foundation), 2016.
GRE may terminate before 36 mos. (p. 62)
It appears that the 36-month period is an upper limit; therefore, an estate ceases to be a graduated rate estate earlier if its administration has concluded earlier under general law principles. [fn 18: If, for example, a spousal trust or a trust for the deceased's children is established from assets of the deceased's estate pursuant to the will before the 36-month period expires, the spousal or children's trust is not a graduated rate estate. See Society of Trust and Estate Practitioners (STEP)/CRA round tables, June 25, 2015 and June 10, 2016.]
The U.S.-resident estate of a U.S.-resident individual who died holding real estate in Canada and did not have a social insurance number (“SIN”) will realize a gain on the disposition of the property. Can a non-resident estate be a graduated-rate estate (“GRE”) and, if so, what would CRA consider as “such other information as is acceptable” in meeting the requirement in para. (c) of the GRE definition?
CRA indicated that the GRE definition does not require an estate to be resident in Canada, nor that the deceased have been resident in Canada before death. Instead, the requirement in para. (c) is to provide the SIN of the deceased, or other acceptable information, allowing CRA to ensure that only one graduated rate estate designation is made for each deceased individual.
In this situation, if the deceased did not have a SIN, the estate could provide a temporary tax number or an individual tax number.
An estate initially was not resident in Canada but 18 months later, on January 1, 2018, it became resident in Canada as the result of the appointment of a new trustee. Consequently, pursuant to s. 128.1(1)(a)(i), a new taxation year commenced, and the Estate will file its first tax return in Canada for the period January 1, 2018 to December 31, 2018. Can the estate designate itself as the graduated rate estate (“GRE”) of the deceased (non-resident) individual when filing its first tax return under Part I – and what is required respecting if there was no SIN?
CRA indicated that the requirement in para. (d) of the GRE definition - that the estate designate itself as the GRE of the deceased individual in its Part I return for its first taxation year ending after 2015 – would be satisfied if such designation was made in the estate’s return for its first taxation year after 2015 in which it was required to file a Part I return. Here, as there are no facts suggesting that the trust should file a Canadian tax return before 2018, all the requirements can be satisfied for the estate to be a GRE, and it could designate itself to be a GRE of the individual when it files its 2018 return.
As for (b) of the question, para. (c) of the GRE definition requires an individual’s SIN to be provided on the estate’s income tax return each year or, if the individual had not been assigned a SIN before death, such other information as is acceptable to the Minister.
If the individual did not have a SIN, the Minister would accept a temporary tax number, or an individual tax number, which can be obtained by filing a T1261.
Respecting the requirement for an estate to designate itself, in its first T3 return of income for the first taxation year after 2015, as the individual's graduated rate estate (GRE), CRA stated:
If the designation for the trust to be a GRE is omitted in error, an adjustment request containing the elements required for the designation and the rationale for the omission from the original filing may be submitted to the CRA.