Principal Issues: Four questions were posed relating to a scenario in which a will provides for the division of estate assets and the creation of a spousal trust and a trust for children of the deceased.
Position: Responses provided.
Reasons: See below.
STEP CRA Roundtable – June 10, 2016
QUESTION 1. Graduated Rate Estates and Transfers to Testamentary Trusts Created by Will
The definition of “graduated rate estate” in subsection 248(1) of the Act requires such an estate to be a testamentary trust and that no other estate is designated as the graduated rate estate of the deceased individual. At the 2015 STEP – CRA Roundtable, CRA stated that an individual can only have one estate. This view is consistent with the Department of Finance’s Technical Notes. Accordingly, even if a person has multiple wills, different executors, assets in Canada and in foreign countries and so forth, all of these assets would be grouped together such that they collectively form one estate (assuming of course that these assets are not held in joint tenancy with right of survivorship).
Suppose that a deceased taxpayer’s will provides that the assets are to be divided into a spousal trust and a trust for children. Does this mean, as a practical matter, that three testamentary trusts would in fact be formed, the spousal trust, the trust for children, and a third trust which would be called, for want of another description, the general estate?
a) If assets were held in the general estate, and not transferred to the spousal or children trusts, say for a period of two or three years while the estate is under administration, would tax returns be required for all three testamentary trusts (presumably nil tax returns except for the general estate as the other trusts would hold no assets)?
b) Taking this further, suppose that the deceased died in 2014, and in 2015 all of the assets were held in either the spousal trust or the children trust. Does this mean that in 2016, there is no graduated rate estate?
c) Can assets be transferred from the other testamentary trusts back to the graduated rate estate? Or would this offend the anti-stuffing rule under paragraph (d) of the “testamentary trust” definition in subsection 108(1)?
d) To obtain access to the new rules on donations, these donations need to be made by the general estate and not the other testamentary trusts. If so, does this mean in practice that the general estate must remain as such until the donations are fully made (which might now extend to 60 months)?
CRA Response
a) In our response to Question 8 at the 2012 STEP Roundtable, CRA noted that generally, we view trusts that arise out of the estate residue as arising on death. This view was reiterated in our response to Question 2 at the 2015 Roundtable. That said, it should be noted that ultimately it will be a question of legal fact as to when such trusts are established, and this will determine the filing requirements for tax returns under the Income Tax Act (the “Act”).
b) Pursuant to the definition of a graduated rate estate (“GRE”) in subsection 248(1) of the Act, only an estate can be a GRE. Once property is transferred from the estate to a testamentary trust, that trust cannot be a GRE. In the example provided where the deceased died in 2014, and in 2015 all of the assets were held in either a spousal trust or a trust for children of the decedent, there would be no GRE in 2016.
c) Paragraph (b) of the GRE definition requires that the estate must be a testamentary trust as defined in subsection 108(1) of the Act. Paragraph (b) of the testamentary trust definition provides that where property has been 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. Assets transferred to a GRE from the other testamentary trusts would cause the estate to lose its testamentary trust status and therefore it would no longer be a GRE.
d) A GRE in respect of a decedent can remain as such for a maximum of 36 months following the death of the individual. For deaths occurring after 2015, the Department of Finance legislative proposals of January 15, 2016 in respect of subsection 118.1(5.1) of the Act would, if enacted into law, allow an estate that ceases to be a GRE only because 36 months has passed since the death, to make a donation within 60 months of the death.
Under the proposed change, the requirements other than in paragraph (a) of the GRE definition must be met, including that it be the estate that arose on and as a consequence of the individual’s death.
2016-063487
Lena Holloway