Graduated Rate Estate

After the Office of the Public Trustee for the Province (the “Trustee”) finalized the Estate of the deceased, received a CRA clearance certificate, and closed its file, with the 36-month graduated rate estate (“GRE”) period then expiring, the Trustee was contacted by the Government of Canada Pension Centre that a pension payment was still owing to the deceased, which amount was then paid and received by the Estate on the last day of the Estate’s taxation year, and distributed by the Trustee in the following taxation year.

The Trustee re-opened the Estate and reported the lump sum benefit, which was taxed at the highest marginal tax rate applicable to individuals. Upon filing the T3 return, the Trustee requested that the GRE period be extended to include the year in which the pension amount was received. The Directorate stated:

The GRE definition does not provide the Minister of National Revenue with the ability to extend the 36-month period, nor can the authority for such an extension be found elsewhere in the Act.

An estate may be a graduated rate estate (“GRE”) a maximum of 36 months following the deceased’s death. Suppose that a lump sum from the pension plan of the deceased is not received by the estate until beyond this 36-month period – and the executor is unable to distribute the income to the sole beneficiary before the end of the year of receipt. Can the Minister, where the late payment of the pension benefits is not the fault of the executor, extend the GRE status of the estate beyond the 36-month period?

CRA noted that the GRE definition does not provide the Minister with the discretion to extend the 36 month GRE period, nor does that authority exist anywhere else in the Act.

On the death of a non-resident individual, who had been filing T1 returns pursuant to the s. 216 rules regarding a Canadian rental property, that property was acquired by her non-resident estate at FMV, then was distributed to her two non-resident children (Y and Z - the residuary beneficiaries) as equal co-owners. CRA indicated that the non-resident estate can be a graduated rate estate (“GRE”) and the estate is not precluded from filing T3 returns pursuant to s. 216, stating:

A non-resident estate could be a GRE. Neither section 216 nor the definition of a GRE includes any language distinguishing a non-resident estate filing under Part I (T3 Return) on an elective basis pursuant to section 216 in respect of a Part XIII tax liability from a taxpayer who is required to file under Part I in respect of a Part I filing obligation. There is no provision in the Act prohibiting an estate filing under section 216 from qualifying as a GRE.

A non-resident estate could file its return of income under Part I pursuant to a section 216 election by the filing due date set out under section 216 and make the GRE designation in the return. While the Estate is a GRE, the Estate will be taxed at the graduated rates in respect of the net rental income.

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.

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.

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 60^th month)?

CRA responded:

(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.

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.

(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."