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SUCCESSion: Tax & Estate Matters

Jan 27, 2017

Estate Administration for Deaths Since January 1, 2016

The estate planning and administration landscape significantly changed on January 1, 2016. For those appointed as an executor of an estate for an individual that died anytime since, here are three of the new rules to keep in mind:

1.         Graduated Rate Estate. Whereas all testamentary trusts previously benefited from graduated income tax rates, this advantage is now only available to specific testamentary trusts, including the Graduated Rate Estate ("GRE").  Subsection 248(1) of the Income Tax Act (Canada) (the "Act") imposes the following requirements for an estate to qualify as a GRE:

i.          The estate must arise as a consequence of an individual's death;

ii.          The estate must be a testamentary trust;

iii.         No more than 36 months may have passed since the date of death;

iv.        The estate must be designated as a GRE on its first tax return;

v.         The estate may be the only estate of the individual designated as a GRE; and

vi.        The individual's social insurance number must be included on each tax return filed in respect of the GRE.

This means that executors can continue to take advantage of graduated income tax rates during an estate's first three years, but only in respect of assets that remain vested in the general estate; any testamentary trust established out of the general estate, such as a spousal trust, other lifetime benefit trust, trust for minor, or residence trust, in addition to any general estate still being administered after the expiry of the initial 3-year period, is automatically subject to the top marginal rate on all income (in Ontario the combined top rate is 53.53%).

2.         Year-end. Executors now have the ability to select a non-calendar tax year for GREs. This means that executors may choose any date within 12-months from the date of death as the year-end. Nevertheless, each GRE will have a deemed tax year-end at the date of termination of the GRE – i.e. at the end of the 3-year GRE period or on such earlier date that the estate ceases to be a GRE. Subsequent tax year-ends for the estate, and all year-ends for other trusts created therefrom, will be December 31st.

3.         Charitable donations made by Will. Charitable donations made by Will are now deemed to be made by the estate at the time the donation is completed, as opposed to being made by the individual on the date of death. If a donation is made by a GRE, executors have additional flexibility to maximize the benefit of the donation by allocating the donation tax credit among:

i.          the estate's return for the year the donation is made;

ii.          the estate's return for any preceding year;

iii.         the individual's terminal return; and

iv.        the individual's personal return for the year prior to death.

Where a charitable donation consists of property other than cash, the estate may realize a capital gain or loss if the value of the property increases or decreases between the individual's death and the date the donation is made. If the estate is a GRE at the time of the gift, in addition to the above-listed opportunities to allocate the donation tax credit, pursuant to s.38 and s.39 of the Act, executors have added opportunities to eliminate the capital gains inclusion on the individual's terminal return in respect of certain types of donated property, including publicly traded securities.

We invite you to contact our Tax and Estates department for more information on these changes and others implemented as a result of recent updates to the Act.

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