Currently testamentary trusts and grandfathered inter
vivos trusts benefit from graduated rates of taxation, but
commencing January 1, 2016, these trusts will be subject to the top
marginal tax rates. In the 2013 Federal Budget, the Federal
Government announced that these changes were being introduced as a
response to certain perceived abuses, including the use of multiple
testamentary trusts and tax motivated delays in completing estate
Draft legislation respecting these changes was released on
February 11, 2014, updated on August 29, 2014 and subsequently the
legislation received royal assent on December 16, 2014. The result
is that all trusts, other than graduated rate estates and qualified
disability trusts, will be subject to the highest marginal rates of
taxation. This article will address the concept of a graduated rate
estate and some of the benefits that GREs will receive.
Subsection 248(1) of the Income Tax Act, R.S.C., 1985,
c. 1 (5th Supp.), as amended, (the "Act")
defines a graduated rate estate ("GRE") as an estate that
arose on and as a consequence of an individual's death if:
no more than 36 months has passed
since the date of death;
the estate is considered a
testamentary trust for tax purposes;
the individual's Social Insurance
Number is provided in the estate's return of income for the
taxation year in question and all prior taxation years;
the estate designates itself as the
GRE of the individual in its first taxation year that ends after
no other estate designates itself as
the GRE of the individual for a taxation year ending after
GREs maintain their status as such for up to 36 months, and
during this time, some of the benefits conferred upon GREs are as
1. Graduated Income Tax Rates
Graduated tax rates currently enjoyed by testamentary trusts
will only apply to GREs and qualified disability trusts effective
January 1, 2016. Income earned and retained in the estate will be
taxed at graduated rates.
2. Loss Carry-backs and Avoidance of the Stop-loss Rules -
subsections 164(6) and 112(3.2) of the Act
Effective January 1, 2016, the loss carry-back provisions of
subsections 164(6) and 112(3.2) of the Act are restricted to a GRE.
It will be important for any post-mortem double tax planning
involving private corporation shares that an estate designated as a
GRE holds the shares.
3. Capital Gains Inclusions
Only a GRE will be able to report a nil capital gain on the gift
of shares on death (for deaths after 2015).
4. Charitable Donations
Effective January 1, 2016, the rules regarding charitable giving
in a will are changed. The charitable donation will be considered
to be made at the time when the property is actually transferred to
the qualified donee (e.g. registered charity) by the estate. The
donation value for tax receipting purposes is the fair market value
of the donated property at the date of transfer (instead of on the
date of death). Subsection 118.1(1) of the Act will provide
flexibility to allocate the donation between the deceased and an
estate that qualifies as a GRE. A gift made by a GRE can be used
the deceased in their terminal return
for their last taxation year;
the deceased for their taxation year
preceding the taxation year of death;
the GRE for the year in which the
donation is made;
the GRE for its prior taxation years
(which would be the 2 prior taxation years, assuming the maximum 36
month allowable period is available); or
the GRE for the 5 subsequent taxation
Estates that are not a GRE will be able to claim a charitable
donation tax credit in the same manner as other trusts.
5. Calendar Year End
Only GREs will be able to have non-calendar year-ends. For
existing testamentary trusts not qualifying as a GRE that have
non-calendar year ends and will be in existence as of December 31,
2015, a deemed year end will occur at that time and for all
following years the calendar year end will apply.
While the genesis of these changes was top rate taxation for
testamentary trusts, depending upon the deceased's
circumstances, qualifying an estate as a GRE may be most important
for tax results other than top rate taxation, such as charitable
giving and post-mortem tax planning.
The elimination of graduated tax rates for testamentary trusts
and the introduction of the GRE and qualified disability trusts
will require practitioners to rethink and adjust traditional
post-mortem planning. It will be crucial for estates to align
themselves to qualify as GREs to take advantage of benefits such as
graduated tax rates, flexibility regarding the use of donation
credits and ability to effectively implement post-mortem planning
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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It is not uncommon for parents to provide monetary gifts to their adult children. Parents may wish to help their child with a down payment on a property, or help pay out their child's existing mortgage.
On March 31, 2014, BC's new Wills, Estates and Succession Act1 ("WESA") will come into force. WESA introduces new protections for beneficiaries of estates that are in danger of being disputed or deemed ineffective by a court.
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