CRA answers questions on graduated rate estates

A GRE is an estate that arises upon the death of an individual on or after Dec. 31, 2015, and no more than 36 months after that individual’s death. Following the 36-month period, the GRE becomes an ordinary testamentary trust, which is subject to taxation at the highest marginal rates.

The primary benefit of a GRE is that income earned in the trust is taxed at the same graduated tax rates as individual taxpayers are, providing an opportunity for significant tax savings relative to the way most other trusts are taxed. A GRE designation provides access to other tax and estate-planning benefits, including greater flexibility in the way donation tax credits can be claimed.

In order to be considered a GRE, an estate must designate itself a GRE in its first year’s tax return and must use the deceased’s social insurance number (SIN) on each tax return filed during the period at which the estate is a GRE. Only one estate of an individual can be designated a GRE.

The following questions were posed to the CRA regarding GREs:

Can a GRE become a qualified disability trust?

A qualified disability trust (QDT) is a testamentary trust that arises on the death of an individual who jointly elects, with a beneficiary under the trust, to be a QDT. Income earned in a QDT is taxed at graduated rates, just as a GRE is taxed. The beneficiary of the trust must be eligible for the disability tax credit (DTC) in order for the trust to be a QDT.

At the roundtable event, the CRA was presented with a fact scenario in which a beneficiary of a GRE becomes disabled during the period in which the estate is a GRE. Could the estate elect to be a QDT and thereby continue to access graduated rates beyond 36 months, the CRA was asked.

A CRA official indicated that it was possible for a GRE to become a QDT, as long as the estate met all other conditions for being considered a QDT.

“The fact that the estate made a GRE designation in [its] earlier years doesn’t have any impact on this whatsoever,” said roundtable panellist Steve Fron, manager in the trusts section of income tax rulings directorate of the CRA.

However, it would be unlikely, in practice, that an estate could benefit from access to graduated tax rates indefinitely, Fron said. That’s because, in most cases, the process of estate administration — the collection of assets, the payment of debts, the distribution of residue to beneficiaries, etc. — would eventually come to an end.

“Estate administration typically doesn’t include the ongoing management of assets that have been bequeathed to a particular individual,” Fron said.

Given the fact scenario presented at the roundtable, there was nothing to suggest that the executor would be prevented from paying out the residue of the estate, Fron said.

“To the extent that the particular facts and law [of a fact scenario] suggest that the estate administration is complete and beneficial ownership has passed to the residual beneficiaries who are entitled to the property, there wouldn’t be any income earned in the estate,” Fron said. “Alternatively, to the extent that the particular facts and law suggest that the beneficiary is able to enforce payment of the income earned within the estate, there would be no income taxable in the estate, as it would all be considered to be payable to the beneficiary.”

Can an estate that immigrates to Canada be a GRE?

The panel was presented with a fact scenario in which a non-resident individual dies in June 2016, with the estate arising from the individual’s death also being non-resident. On Jan. 1, 2018, the non-resident trustee of the estate resigns, and is replaced by a trustee who is a Canadian tax resident, resulting in the estate becoming a tax resident, and a new taxation year for the estate commencing. Can the estate designate itself a GRE when it files its first tax return?

Panellist Marina Panaourgias, an industry sector specialist in the trust section of the income tax ruling directorate of the CRA, indicated that the estate, under the given fact scenario, could be a GRE, as long as it made a designation to be a GRE at the end of its first tax year.

“Assuming that there would be no facts that suggest that the estate would have been required to file a return before the 2018 tax year, and assuming all the requirements are met for the estate to actually be a GRE, then the estate could in that situation designate itself to be the GRE of the individual when it files its Canadian tax return [for] 2018,” Panaourgias said.

If the non-resident individual had not been assigned a SIN before death, the estate could use either a temporary tax number or an individual tax number (ITN), which could be obtained by filing CRA Form T1261, the application to obtain a Canadian ITN for non-residents.

Can a non-resident estate be a GRE?

The panel was presented with a fact scenario in which a non-resident (in this example, a U.S. citizen) dies owning Canadian real estate. The trustee of the estate is also non-resident, and the estate itself is non-resident. As the Canadian real estate is taxable Canadian property, and as there’s a deemed disposition of the property on death, the executor files a Canadian tax return for the deceased, reporting a capital gain. The estate is also anticipated to realize a gain. Can the non-resident trust be a GRE, and what should the executor do regarding the requirement for a SIN?

Panaourgias confirmed that a non-resident estate can be a GRE: “The criteria for an estate to be a GRE that are outlined in the definition [in the Income Tax Act] don’t require an estate to be resident in Canada, and don’t require the deceased individual to have been resident in Canada before they died.”

Also, as noted earlier, the executor could obtain either a temporary tax number or an ITN in respect to the deceased non-resident in lieu of a SIN, Panaourgias said: “What that does is basically allow the CRA to ensure that only one GRE designation is made for the deceased individual.”