Tag: graduated rate estate

08 Mar

Planning Considerations for Graduated Rate Estates

Lisa-Renee Beneficiary Designations, Estate & Trust, Estate Planning, Executors and Trustees, Trustees Tags: , , , , , , , , 0 Comments

Our blog has previously discussed Graduated Rate Estates (“GRE”) and changes to the Income Tax Act, which now limit the benefit of graduated rates of taxation for up to 36 months from the date of death if the estate qualifies as a testamentary trust, and is designated as a GRE in its first taxation year.

MoneyChanges to the tax benefits of testamentary trusts raise a number of planning considerations that should be considered when making an estate plan.  First, when drafting a testamentary trust, a key consideration should be whether it would be beneficial to the estate and its beneficiaries to delay the distribution of the estate for up to three years to potentially maximize the progressive taxation rates of all income in the trust.

If a testamentary trust is established with a view to take advantage of the new tax regime, then another important consideration is the extent of discretion that a testator wishes to grant to his or her Estate Trustee. Since an estate must maintain its status as a GRE, a testator may wish to clearly direct his or her Estate Trustee to take steps necessary to use or manage the estate assets in a manner that is consistent with the GRE requirements set out in section 248(1) of the Income Tax Act.   Alternatively, the testator may wish to authorize his or her Estate Trustee to determine whether it is necessary or beneficial to preserve the estate’s status as a GRE in light of circumstances that may arise post-mortem.

All estate planning considerations that are intended to take advantage of changes to the Income Tax Act should be discussed with a tax professional throughout the estate planning process.

Thanks for reading!

Lisa Haseley

17 Aug

Graduated Rate Estates and Changes to the Income Tax Act

Ian Hull Estate Planning Tags: , , , , , , 0 Comments

The 2015 Budget and changes to tax treatment of testamentary trusts have been discussed on this blog before. Bill C-43 has since become law, and will become effective January 1, 2016.

The amendments to the Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.)) (the “I.T.A.”) have eliminated graduated rate taxation for testamentary trusts, which were previously taxed at rates applicable to individuals. Starting next year, testamentary trusts will be taxed at the highest marginal rate of taxation, subject to a couple of exceptions, one of which applies to a testamentary trust that can be considered a Graduated Rate Estate (GRE). The purpose of these amendments is to try to eliminate unequal treatment of testamentary trusts as compared to inter vivos trusts, which are taxed at the highest marginal tax rate, while testamentary trusts have enjoyed graduated rates for decades.

Starting December 31, 2015, the I.T.A. s. 248(1) will contain a definition for a GRE. In order to qualify as a GRE and benefit from graduated rates of taxation, no more than 36 months can have passed after the death of the testator whose estate established the trust, it must designate itself as a GRE, and only one GRE can be designated per individual. Going forward, as noted in this article from a national law firm, only GREs may benefit from graduated tax rates, use certain loss carry-back provisions, and have a non-calendar year end.

Another exception to the elimination of graduated rates of taxation applies to a qualified disability trust. The I.T.A. s. 122(3) states that in order to be a qualified disability trust, it must: (i) be a testamentary trust; (ii) the beneficiaries of the trust must have made a joint election with the trust for the trust to be a qualified disability trust, and (iii) s. 118.3(1)(a) to (b) must apply to such beneficiaries.

There have also been changes to treatment of charitable donations made in a Will. Whereas, in the past, a charitable gift was considered to be made immediately preceding the death of the testator, the new rules provide that the gift is made at the time it is actually transferred to the donee. The value of the property will also be determined on this basis. The amount of the charitable donation can then be allocated between the deceased or the GRE, as per I.T.A. s. 118.1(1), as long as the Estate can be considered a GRE at the time. The amount of the gift can be deducted by the deceased in the year the donation was made or used in the preceding taxation year. Alternatively, the gift can be deducted by the GRE in the year of the donation, carried forward, or carried back for up to the 36 months that a GRE may exist as such.

Thank you for reading.

Ian Hull

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