Much talk about the upcoming changes to the taxation of trusts
and estates has surrounded the introduction of the concept of
Graduated Rate Estates. Effective January 1, 2016, the Income
Tax Act will recognize 3 types of testamentary trusts: a
Graduated Rate Estate ("GRE"), a Qualified Disability
Trust ("QDT") and all other testamentary trusts
Currently, testamentary trusts are taxed in the same way as
individuals – at graduated tax rates. Following the
implementation of the new tax changes, OTTs will be taxed at the
highest marginal tax rates. QDTs – trusts where the
beneficiary qualifies for a disability tax credit, and GREs, will
continue to be eligible for the graduated rates of tax.
A GRE may only enjoy the benefits of graduated tax rates for up
to 36 months. Certain criteria must be present for an estate to
qualify as a GRE – and benefit from the graduated rates
available to GREs. The estate must designate itself as a GRE
in its first tax return; the deceased individual's SIN must be
provided; there must be no other existing GRE for the deceased
individual; and no more than 36 months may have passed since the
death of the individual.
Notwithstanding the 36 month maximum period for a GRE, under the
new tax rules, it is possible in some circumstances to maximize the
benefits of the GRE graduated tax rates by stretching this 36 month
period into four taxation years rather than three. The tax law
permits a GRE to have an off calendar year end. By selecting a
taxation year end between the date of death and its first
anniversary, the estate may be able to benefit from a longer period
of graduated rates. This could be especially useful where the GRE
holds shares of a private corporation paying dividends over this
As only one estate may be designated as a GRE for a deceased
individual, consideration must be given to the impact of that
designation where an individual has multiple wills, or multiple
testamentary trusts. For example, if a GRE transfers assets to a
trust established under the will of the deceased individual, that
trust is considered to be an OTT. If a capital loss is realized on
the sale of a property in the first taxation year following the
date of death, the loss may now only be carried back to the
terminal return from a GRE. Consequently, if an OTT incurs the loss
but does not have any capital gains to offset the loss, the loss
may never be used.
The new rules surrounding GREs allow greater flexibility in
using the charitable donation tax credit. Where a charitable
donation is made by a GRE, the donation tax credit can be divided
between the deceased and their GRE. In such case, the donation may
be applied to the taxation year of the GRE in which the donation
was made, a prior taxation year of the GRE, or the final two
taxation years of the individual. Charitable donations made by will
or a GRE are deemed to have been made when actually transferred to
the charity (not at the date of death) and, according, if the
estate is not a GRE at the time the donation is made, the ability
to apply the donation to prior years will be lost and the tax
benefit arising from the donation may be reduced.
Anyone looking to maximize the benefits of GREs should speak to
a practitioner knowledgeable about such changes.
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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