This year has seen a number of changes to the taxation of estates in Canada, with the biggest change coming in new graduated rate estate (GRE) rules.
In the past, Canadian estate tax returns benefited from graduated rates, just like individual tax returns, meaning that the tax rate increased as income increased. A fairly common estate planning tool took advantage of these graduated rates by creating multiple testamentary trusts (essentially a will trust that comes into effect once a person has died) in the will so more income was taxed at the low rates.
Under the new rules, there can only be one GRE per person. Any other trusts, for example a spousal trust, will be taxed at the highest rate. The graduated rates for the one designated estate are available for 36 months after death. After 36 months, if the estate still exists, the top tax rate will apply.
How an estate can be considered a graduated rate estate
To be considered a GRE, an estate has to exist as a consequence of an individual’s death. It also has to be designated as a GRE on the tax return for the first taxation year and there can be no other estate designated as the GRE of the same individual.
The benefits of being designated a GRE
While GRE status provides lower marginal tax rates, there are other benefits to designating an estate as a GRE as well including:
When an estate realizes a capital loss within the first taxation year, GRE status allows the loss to be carried back to the terminal return. This carryback is now only available to GREs.
- There’s greater flexibility in allocating donation credits made per the will between the estate returns and the final two individual tax returns. Non-GREs will only be able to include these donations on the estate tax returns. (Donation rules are also new this year and I’ll delve into them in more detail in my next post.)
- Only a GRE will be able to report a nil capital gain on the gift of shares on death
- A GRE will be able to have a non-calendar year-end while other trusts will have to use December 31.
Designation of the GRE will be a critical component of estate plan going forward. If you have an estate plan already in place, talk to your lawyer and tax advisor to ensure your existing plan will still be effective under the new rules.