2015-0572091C6 2015 STEP – Q2 – Meaning of Graduated Rate Estates

Principal Issues: CRA comments requested on meaning of graduated rate estate, including what property is included & what happens when there are 2 wills.

Position: General comments provided

Reasons: See below.

Author: Holloway, Lena
Section: 248(1)

STEP CRA Roundtable - June 18 2015
Question 2 - Meaning of Graduated Rate Estate

Under the new rules for testamentary trusts, a fundamental starting point is the definition of graduated rate estate, added to subsection 248(1).

It would seem extremely important for a testamentary trust to be a graduated rate estate for various reasons which include:

i.    The obtaining of graduated tax rates for the first 36 months;
ii.   A $40,000 exemption from AMT;
iii.  The making of an election under subsection 164(6);
iv.   The reduction of the denial of capital losses to 50% of what would otherwise result, as provided for under subparagraph 112(3.2)(a)(iii);
v.    Determining whether a donation made by will can be claimed by the deceased pursuant to clause 118.1(1)(c)(i)(C), which is a component of the definition of total charitable gifts; and
vi.   Determining whether on a donation by will of a publically traded security, a taxable capital gain is included in the income of the deceased at death (by virtue of a deemed disposition under section 70), or the amount is deemed nil.

There may be other provisions which are also affected by whether or not a testamentary trust is a graduated rate estate.

As result, we are keenly interested to understand more fully the definition of graduated rate estate.

It can be inferred, from the definition of graduated rate estate, that the government contemplates situations where an individual may have more than one estate (notwithstanding the fact that the Department of Finance’s Technical Notes state that generally there is only one estate for a deceased individual). Specifically, paragraph (e) of the definition of graduated rate estate states “no other estate designates itself as the graduated rate estate of the individual”. It is also clear that more than one testamentary trust can be created by will.

Our specific questions are:

a)    As a general matter, while an estate is under administration during its first 36 months, will it be considered a graduated rate estate in its entirety? In other words, is the estate an over arching entity which encompasses all the property of the deceased, or is it necessary to identity one specific testamentary trust which will be the graduated rate estate? At what point in time does an estate transition into testamentary trusts, or is this a question of fact to be determined on a case-by-case basis?

CRA Response

Pursuant to subsection 104(1) for purposes of subdivision k, a trust or estate shall be referred to as a trust.  Subject to several restrictions as to what type of property may be held, or as to who contributed the property, subsection 108(1) defines a "testamentary trust" as a trust (including, as per subsection 104(1), an “estate”) that arose upon and in consequence of the death of an individual.  The legal definitions of estate generally encompass the total property of whatever kind that is owned by a decedent prior to the distribution of that property in accordance with the terms of a will, or when there is no will, by the laws of inheritance in the state of domicile of the decedent. An estate encompasses the entire worldwide property owned by anyone, the realty as well as the personalty. Therefore we do not agree with your preceding statement that “It can be inferred, from the definition of graduated rate estate, that the government contemplates situations where an individual may have more than one estate”.

While paragraph (e) of the definition of graduated rate estate requires that “no other estate designates itself as the graduated rate estate of the individual”, in our view, this wording was used for greater certainty to ensure that there not be competing parties attempting to make the designation as the graduated rate estate of an individual. As used in connection with the administration of decedent’s estate, the term includes all property of a decedent. 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.

You may recall our response to Question 8 of the 2012 STEP Roundtable:

A testamentary trust is defined in subsection 108(1) as a trust or estate that arose on and as a consequence of the death of an individual, subject to certain conditions. Consequently, the 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.

      Our colleagues in T3 Assessing advise that in practice each trust created out of the estate residue is given the same commencement date and taxation year end date as the estate.  In circumstances where more than one trust is created out of the residue, a separate T3 trust number is assigned to each trust. 

b)    Where an individual has two wills, does this preclude the possibility that the property of both wills can form one graduated rate estate?

CRA Response

We understand that an individual may often have two wills for the purpose of reducing probate taxes, or for other estate planning purposes.  There is nothing to preclude these being separately administered. By doing so, the individual is effectively determining how their entire estate is to be administered as two distinct but different parcels of assets.

As noted in our response to part (a) of this question, in our view, an individual’s estate encompasses all of the worldwide property owned by the individual at death.

c)    Assuming that it is possible that two wills can be taken together to constitute the estate, does it make a difference if the executors are different, the beneficiaries are different, or the jurisdictions are different (for example, a will constituted under the laws of a province of Canada, and a will constituted under foreign law which governs only foreign assets)? 

CRA Response

Obviously, depending upon the manner in which the estate planning is undertaken, the use of multiple wills may create practical difficulties in regard to the designation as the graduated rate estate of the deceased individual. Information sharing issues, communication between executors, and other such issues can arise. These will need to be considered as an individual’s estate planning takes place. 

d)    Are there any other helpful comments you can give concerning the meaning of graduated rate estate, which can be used as guidance for estate planning and tax planning purposes? It is noted that depending on the answers to the questions above, many persons may wish to consider major revisions to their estate planning in order to benefit from the traditional post-mortem estate planning methods used in the past.

CRA Response

CRA is, of course, prohibited from offering specific tax planning or legal advice. However, as was noted in our response to (c) above, we would emphasize the obvious importance of fully considering the potential practical issues that may arise from the use of multiple wills in terms of a designation as the graduated rate estate of a deceased.

Lena Holloway
2015-057209

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