As a result, there are several potential benefits that require careful consideration as part of an estate plan and judicious execution by executors of estates. It may be prudent for individuals to revisit their Will planning and make necessary adjustments. For executors, it will be important to know how to maximize the benefits of GREs and understand the flexibility regarding donations and the ability to implement post-mortem planning strategies.
When a Canadian resident dies, their estate attains the status of a testamentary trust and is taxed as a separate and new taxpayer. In 2016, the Canada Revenue Agency added new classifications to alter how testamentary trusts are taxed. GREs are one of the new classifications. Unlike some other trusts which now incur top personal income tax rates, GREs pay at marginal rates (i.e. rates that range from zero to the maximum amounts, once taxable income exceeds $220,000).
Requirements for a GRE
A GRE is a trust that arises on, and as a result of, the death of an individual. Consequently, if another person contributes or loans property to the estate of the deceased, or the estate receives a distribution from another trust, then the GRE status and the benefits of the GRE will all be lost.
Also, CRA has indicated that the GRE will automatically lose its status and future benefits if it still exist 36 months after the death of the individual. GRE status also could be lost, prior to the 36-month period, if the executors unnecessarily delay the distribution of the net residue of the estate to beneficiaries. Finally, CRA has requirements that must be met when tax returns are submitted.
Benefits of GREs
1. Graduated income tax rates.
2. A non-calendar year-end to compute income taxes, which allows the trust to have its first year end up to 12 months after the date of death.
3. Overall losses realized in the first tax year of a GRE from the sale of capital property (i.e. real estate and securities) can be carried back and applied against gains and other income of the deceased in the year of death. If death occurs without a Will, or there is estate litigation, it may be difficult to realize such losses within the first tax year.
4. Rules on tax-loss planning to minimize double tax on the deemed sale of shares of privately held companies will only apply to GREs. Hence, if a deceased has multiple Wills, it is critical that executors collaborate to maximize GRE benefits for all beneficiaries.
5. Greater flexibility in using charitable donations. This increases the probability of donation tax credits being fully utilized. Charitable donations will be deemed to be made by the estate, not the deceased. For estates that meet the GRE criteria, the donation tax credit can be claimed by: (a) the GRE in the year of the donation and up to 60 months after the death date; or (b) carried back to prior tax years to the deceased’s final tax return or the tax return prior to year of death.
There is a seven-year window to use charitable donations. But they must be made by the GRE, not another testamentary trust.
Gifts of publicly traded securities acquired by the estate on or as a consequence of the death, or substituted for those shares, that have inherent gains will not pay income taxes on the accrued gains if donated. The estate will receive a donation tax credit for the full fair-market value of the securities. Thus a GRE benefits from the same tax treatment on in-kind donations as living donors.
This favourable tax treatment may suggest a GRE donate publicly traded shares rather than cash equal to the fair market value of the securities.
6. An exemption from income tax instalments, thus permitting payment of any income taxes owing on their final due date rather than throughout the year.
7. A basic exemption of $40,000 from Alternative minimum tax on certain preferential tax items.
8. An exemption from a special tax on distributions in respect of certain types of Canadian source income to non-residents.
9. Ability to flow certain investment tax credits, death and other benefits to beneficiaries.
10. An extended deadline to file an objection to an assessment.
11. Refunds possible up to 10 years after the end of a taxation year, at the taxpayer’s request (to allow for a deduction or credit that the GRE neglected to claim).
Other considerations
There is no recognition of accrued gains of assets on the death of an individual when asset ownership is properly registered in the name of a spouse or a spousal or common law partner trust within 36 months of a death. Since such trusts are not GREs, an executor can use the marginal tax rates of the GRE before the distribution of the identical asset to the spouse, testamentary spousal or common law partner trust.
Once assets are distributed from a GRE, a beneficiary cannot contribute them back to the GRE to enjoy the benefits.
Finally, this article is not intended to provide tax advice. Every situation is different, so professional help should be sought.
(Anthony M. Cusimano, CPA, CMA, CA, LPA (www.cusimanopc.com) is a chartered professional accountant in the Greater Toronto Area. Since 1980 he has advised clients on how to grow their businesses and minimize income taxes.)