At a recent conference of the Society of Trust and Estate Practitioners, the Canada Revenue Agency (“CRA”) was asked to respond to certain questions regarding Graduated Rate Estates (GRE’s), in particular around the actual definition of a GRE and its application to a situation where the deceased has more than one will.
Definition of a GRE
The CRA was asked that 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, does the estate encompass 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 responded that the Income Tax Act defines a “testamentary trust” as a trust (including, as 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 personality.
While the definition of graduated rate estate requires that “no other estate designates itself as the graduated rate estate of the individual”, the CRA believes, 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.
Further 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.
The CRA confirms 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 trust number is assigned to each trust.
Two Wills
Where an individual has two wills, does this preclude the possibility that the property of both wills can form one graduated rate estate?
The CRA confirms 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 above, an individual’s estate encompasses all of the worldwide property owned by the individual at death.
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)?
The CRA notes that 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.
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