All About Estates

Graduated Rate Estates: Does the 36 month rule mean a maximum of 3 taxation years?

As my fellow bloggers have written, there are now 3 types of testamentary trusts under our tax law: a Graduated Rate Estate (“GRE”), a Qualified Disability Trust (“QDT”) and all other testamentary trusts (“OTT”).

Previously, all testamentary trusts were generally taxed in the same way individuals were – at graduated tax rates. Effective January 1, 2016, OTT’s will be taxed at the highest marginal tax rate. However, GRE’s which generally arise from the assets left behind at time of an individual’s death and distributed to beneficiaries in accordance with the deceased’s will, continue to eligible for the graduated rate of tax for the first 36 months maximum following the date of death.

Nevertheless under the new GRE rules, it is possible in some circumstances to maximize the benefits for a GRE by stretching this 36 month period into four (4) taxation years rather than three (3). The tax law permits an off calendar year end. By selecting a taxation year-end that is before the anniversary date of death, the estate may be able to benefit from graduated tax rates over a maximum of four (4) taxation years. By way of example, assuming a date of death of June 30, 2016, the executor of the GRE selects a January 31 yearend. The taxation years for the GRE would be January 31, 2017 (7 months), January 31, 2018 (12 months), January 31, 2019 (12 months), and June 30, 2019 (5 months) when the tax law imposes a deemed year end on the GRE due to the expiry of the 36 months.

The above could prove very useful in various circumstances – for example where the GRE holds shares of private corporations paying dividends over this period.

At a recent Canada Revenue Agency (“CRA”) roundtable session, this interpretation of the 36 month rule was confirmed by CRA, that is a GRE could be eligible for four (4) taxation years but for a maximum period of 36 months following an individual’s death.

Thanks for reading.

About Steven Frye
CW LLP is a firm of professional advisors providing a comprehensive suite of services to a diverse client base. Our experienced and skilled team can provide personal and corporate solutions to maximize growth potential, wealth and value. Email: sfrye@cwcagroup.com