In the world of trusts and estates law, the acronym “GRE” is a frequent visitor, and while its descriptive meaning, Graduated Rate Estate (“GRE”), may be well known, its impact perhaps less so.
A testamentary trust is a trust created as a result of a person’s death. An estate is considered a testamentary trust for tax purposes. For the first 36 months following a person’s death, an estate may benefit from graduated tax rates if it is a GRE. A testamentary trust must meet certain conditions to qualify as a GRE under the Income Tax Act. For further reading on estate and trust taxation, please refer to our Advisory “Estate and Trust Taxation: Important Considerations.”
There may also be other testamentary trusts created as a result of a person’s death. Most notably, a will may provide that some or all of the estate’s assets be held in any number of trusts, such as a spousal trust, disability trust or an insurance trust. These kinds of trusts are also considered testamentary trusts. However, it is the “general” estate which usually qualifies as a GRE and not other types of trusts that may have been created by a will.
Prior to January 1, 2016, all testamentary trusts were subject to graduated tax rates. However, since then, only one single testamentary trust can benefit from graduated tax rates and must be designated as a GRE. Multiple wills, such as a “Primary Will” and “Secondary Will,” are commonly used in Ontario and other Canadian jurisdictions to minimize exposure to Estate Administration Tax or local taxes paid to probate a will. CRA has confirmed that even where there are multiple wills, there will only be one estate for tax purposes.
How to Qualify as a GRE?
A GRE must meet the following criteria:
- The estate must designate itself as a GRE in its first tax return;
- The estate must be the sole estate designated as a GRE for a deceased person; and
- The estate must include the deceased person’s Social Insurance Number on all tax returns filed.
How Your Estate Benefits from GRE Designation
The most significant benefit of a GRE is that for the first 36 months following a deceased person’s death, it is subject to graduated tax rates on any income earned by the estate. By contrast, an estate that is not a GRE is subject to the top marginal tax rate on all its income. A GRE can also elect to have a non-calendar year end which can be helpful for minimizing and deferring taxes due.
Following the 36-month time period, an estate ceases to be a GRE. There is no opportunity to extend the time period, even if there is ongoing estate litigation or other issues which delay the estate’s administration.
Can Your Estate Lose Its GRE Status?
A GRE can lose its status if any of the following occurs:
- A living person or an inter vinos trust makes contribution(s) to the estate;
- A beneficiary pays for estate expenses on behalf of the estate;
- A beneficiary pays the tax arising from the disposition of an asset(s) on behalf of the estate;
- The estate borrows funds from a beneficiary, and fails to repay the loan within one year of receiving the funds;
- An estate trustee fails to make a distribution of capital to the beneficiary(s), as required under a Will; and/or
- An estate trustee fails to distribute the estate’s assets to the beneficiary(s), following the completion of the administration of the estate.
In addition to the expiration of the 36-month time period, if the GRE has lost its status, or when the estate has been fully administered, it will cease to be a GRE. At that time, the estate will be deemed to have a tax year-end and any future income earned by the estate will be taxed at the top marginal rate.
Qualifying and Remaining as a GRE is Key for Post-Mortem Estate Planning
If a deceased person owned shares of a private corporation, there may be “double-tax” resulting from a capital gain realized on the deemed disposition of the corporation’s shares held by the deceased person on their death, as well as capital gains tax at the corporate level on the assets held by the corporation.
A GRE can rely on certain post-mortem planning techniques to minimize this “double-tax,” such as the “loss carry back” and “pipeline” strategies.
If the estate is not a GRE or is no longer a GRE as it has lost its status prior to completion of the post-mortem planning, it will not be able to take advantage of these planning tools, which can provide significant additional tax savings to the estate.
Lessons Learned
The establishment and use of a GRE can help to minimize taxes owed by the estate and maximize funds available to the estate’s beneficiaries. Professional advice is necessary to evaluate whether GRE status should be obtained and maintained in each particular situation. Proper planning and implementation are crucial to ensure that the benefits of a GRE are fully realized, and that there are no adverse tax consequences.
— Josh Cohen