2021-0883041C6 STEP 2021 –Q14- Extending the GRE 36-month period

Principal Issues: Can the Minister extend an estate’s graduated rate estate 36-month period when the estate receives a lump-sum pension benefit after the 36-month period has ended and the late payment is beyond the executor's control?

Position: No. However, where in the taxation year of the estate, an amount of the estate's income has become payable to a beneficiary of the estate, that amount will be included in the income of the beneficiary pursuant to subsection 104(13) of the Act. The estate may take a corresponding deduction pursuant to subsection 104(6).

Reasons: Wording of the Act

Author: Dannehl, Dawn
Section: 248(1); 56(1)(a)(i); 104(6); 104(13); 104(24)

2021 STEP CRA Roundtable – June 15, 2021

QUESTION 14.  Extending the “Graduated Rate Estate” Period

Generally speaking, pursuant to subsection 248(1) of the Income Tax Act (the Act), a “graduated rate estate” (GRE) of an individual at any time means the estate that arose on and as a consequence of the individual’s death if:

i)    that time is not more than 36 months after the death of the individual;

ii)   the estate is a “testamentary trust” (footnote 1) ;

iii)  the individual’s social insurance number is provided in estate’s T3 Trust Income Tax and Information Return; and

iv)   the estate designates itself as a GRE of the individual; and no other estate makes this designation in respect of the same individual.  

Therefore, an estate may be a GRE for a maximum period of 36 months beginning from the date of death of the individual.  

Consider a situation where an individual is a member of a pension plan which, upon the death of the individual, provides that a lump-sum pension benefit is payable to the estate of the deceased individual.  Unfortunately, on occasion, these payments are received after the GRE status of the estate has expired. Consider a further complication whereby the lump-sum amount is received by the estate at the end of its taxation year and the executor is unable to distribute the income to the sole beneficiary before the end of the year. When this is the case, it would appear that the estate is not be able to calculate its tax payable using the graduated tax rates and the estate’s income would be subject to the highest marginal tax rate for individuals.  

Can the Minister, under circumstances where the late payment of the pension benefits is of no fault of the executor, extend the GRE status of the estate beyond the 36-month period?   If not, is there any way the pension income could be taxed in the estate’s 36-month GRE period?

CRA Response

The GRE definition establishes that at any time, an individual’s estate may be a GRE where that time is not more than 36 months after the individual’s death. The GRE definition does not provide the Minister with the ability to extend the 36-month GRE period, nor can the authority for an extension be found elsewhere in the Act.  

Superannuation or pension benefits are included in the income of a taxpayer for a taxation year when they are received, pursuant to subparagraph 56(1)(a)(i) of the Act. Thus, although the lump-sum pension benefit may have become payable to the estate upon the death of the individual, it must be included in the taxation year of the estate in which it was received. If no amount of the estate’s income has been made payable to a beneficiary of the estate in the taxation year in which the pension benefit was received, the full amount of the benefit will be taxed in the estate.  Where the pension benefit is received after the 36-month GRE period, the graduated rates cannot be used to determine the estate’s tax payable. 

However, where in the taxation year of the estate (footnote 2) , an amount of the estate’s income has become payable to a beneficiary of the estate, that amount will be included in the income of the beneficiary pursuant to subsection 104(13) of the Act. The estate may also take a corresponding deduction pursuant to subsection 104(6) of the Act.  It is important to note that when an amount of income has become payable to a beneficiary, subsection 104(24) of the Act must be considered.  Subsection 104(24) applies for the purposes of subsections 104(6) and 104(13), inter alia, and provides that an amount which is otherwise payable to a beneficiary is deemed not to have become payable to the beneficiary in a taxation year unless it was paid in the year to the beneficiary or the beneficiary was entitled in the year to enforce payment of the amount.  

As noted in the question, no amount of the estate’s income has been paid to the beneficiary during the Estate’s taxation year in which it was received.  Therefore, for the estate’s income for a taxation year to be payable to the beneficiary for the purposes of subsections 104(6) and 104(13), the beneficiary would have to be entitled to enforce payment of the income in the same year.  

The determination of whether a beneficiary is entitled to enforce payment of an amount payable must be made by the executor of the estate as this will, in the least, depend on the relevant law, the terms of the deceased’s will and the status of the executor’s administration of the estate.  

If, based on all the facts and surrounding circumstances, the executor determines that the beneficiary was entitled to enforce payment of the gross amount of lump-sum benefit, the beneficiary must include the amount in their income pursuant to subsection 104(13).  The executor must issue a T3 Statement of Trust Income Allocations and Designations to the beneficiary for the amount that became payable to the beneficiary.

Finally, it should be noted that when certain conditions are met, subsection 104(27) of the Act allows a GRE to flow through to a beneficiary of the estate, the character of certain pension benefits received by the estate and included in the beneficiary’s income.  Given that the estate no longer qualifies as a GRE when the lump-sum pension benefit is received by the estate, this provision cannot be relied upon and pursuant to subsection 108(5) of the Act the pension benefit will be deemed to be income of the beneficiary for the year from a property that is an interest in the estate and not from any other source.

Dawn Dannehl
Steve Fron
2021-088304

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  “testamentary trust” is defined in subsection 108(1) to mean, subject to certain exceptions, a trust that arose on and as a consequence of the death of an individual (including a trust referred to in subsection 248(9.1)).
2  Pursuant to subsection 248(1), “trust” has the meaning assigned by subsection 104(1) and, unless the context otherwise requires, includes an estate.

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