A deceased taxpayer’s will provides that the assets’ division into a spousal and children’s trust.
a) If assets held in the general estate were not transferred to the spousal or children trusts for two years while the estate was under administration, would tax returns be required in the interim for all three testamentary trusts?
b) If in the second year following death, all the assets were held in the spousal and children’s trusts, would there no longer be a graduated rate estate?
c) Can assets be transferred from the other testamentary trusts back to the graduated rate estate without offending the anti-stuffing rule in s. 108(1) - “testamentary trust” - (b)?
d) As donations now must be made by the general estate and not the other testamentary trusts, does this mean that the general estate must remain until the donations are made (up to the 60th month)?
CRA responded:
(a) CRA generally views trusts arising from estate residues as arising at the time of death. We reiterated that general position in question 2 at last year’s Roundtable. If the spousal or children’s are created and holding assets, the Act would require filing in respect of each of them (subject to the T3 Guide exceptions)..
(b) As (per the definition in s. 248(1)) only an estate can be a “graduated rate estate,” a testamentary trust to which property is transferred from the estate cannot be a GRE. Accordingly, if all the assets are held in the spousal or children’s trust or the trust for children in 2016, there would be no GRE.
(c) Para. (b) of the GRE definition requires that the estate be a testamentary trust as defined in s. 108(1) - and para. (b) of that definition is such that where property is contributed to a trust otherwise than by an individual on or after the individual’s death, and as a consequence thereof, it will not be a testamentary trust. Thus, the asset transfer-back to what would have been the graduated rate estate would cause it to no longer be a GRE.
(d) Although, by definition, a GRE can exist for a maximum of 36 months after death, proposed s. 118.1(5.1) provides that estates which cease to be GREs solely by reason that 36 months have passed since death, can make a donation within 60 months of death. However, all of the other requirements of the GRE definition, must be met, including that the estate arose on or as a consequence of the individual’s death.