2019-0805771C6 STEP 2019 - Q11 – Estate as Qualified Disability Trust

Principal Issues: Can an estate be a qualified disability trust (QDT) indefinitely?

Position: Question of law; however, likely not.

Reasons: In the scenario provided the Will directs the executor to pay the residue of the estate to the beneficiary.

Author: Mathanda, Tara
Section: 122(3), 122(2), 104(6), 104(13), 104(24)

2019 STEP CRA Roundtable – June 7, 2019

QUESTION 11. Graduated Rate Estate and Qualified Disability Trust

Consider a situation in which an individual’s will provides that the residue of their estate is bequeathed to a single beneficiary.  Assume that for the first 36 months of the estate it qualifies as a graduated rate estate (GRE) and the appropriate GRE designations are made in the estate’s T3 returns. The nature of some of the property of the estate is such that it is not converted into cash until late in the third year after the individual’s death.

During the 36 month GRE period, the beneficiary becomes disabled such that they are eligible to claim the disability tax credit for the foreseeable future.  Can the estate continue indefinitely and elect to be treated as a qualified disability trust each year such that the graduated tax rates will continue to apply?

CRA Response

Generally, where an estate and the particular beneficiary meet the requirements in the definition of a qualified disability trust (“QDT”) within subsection 122(3) the estate may be a QDT.

That being said, there are certain questions of fact and law that must be considered. Generally, the administration of an estate includes collecting the deceased’s assets, paying the deceased’s debts including any taxes of the deceased or estate, and distributing the residue of the estate to the beneficiaries specified under the will or pursuant to provincial intestacy laws.  Although this is a question of fact dependent on the particular provincial laws and the will instrument, estate administration typically does not include the ongoing management of assets that have been bequeathed to a particular individual. In the scenario provided, the will directs the executor to pay the residue of the estate to the beneficiary, and as a result it would be difficult to argue that the administration of the estate be extended indefinitely. To the extent that the particular facts and law suggest that the estate administration is complete and beneficial ownership has passed to the residual beneficiaries who are entitled to the property, there will be no income earned within the estate.

Alternatively, to the extent that the particular facts and law suggest 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 under subsection 104(13), consistent with subsection 104(24).

To ensure the benefits of being a QDT are available, it would be prudent for taxpayers to have the appropriate language in their will that provides for the establishment of a testamentary trust which qualifies as a QDT and is separate from their estate.

Tara Mathanda
2019-080577

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