Should the income of a graduated rate estate for its final year be taxed in the estate or in the hands of the beneficiaries or of the estate, where the final year: a) ends after the executor’s year; b) ends during the executor’s year or c) coincides with the end of the executor’s year?
(a)
After noting that the position in IT-286R2, para. 6 - that the income earned in the first 12 months of the estate will be considered payable to the beneficiaries, even though the estate is still under administration and the beneficiaries are not able to enforce payment of such income, provided that none of the beneficiaries object to such treatment - only applies to the executor’s year, CRA stated:
That is to say, where the only reason that an amount of income is not payable to the beneficiaries is that it was earned in the initial 12 months of the estate, the income can be considered payable to the beneficiaries provided that all beneficiaries agree to such treatment. This would not apply to any other situation in which the amount was not payable to the beneficiaries because the terms of the will did not provide for such a distribution or in which the income was not allocated to the beneficiaries in proportion to their respective shares of the estate.
[T]he [above] treatment … which allows income in the executor’s year to be considered as payable to the beneficiaries (if all of the beneficiaries agree to the treatment) relates only to situations where the estate has not been wound up in the executor’s year such that the estate administration continues beyond the first year. Also the income must otherwise be payable to the beneficiaries.
Whether the income earned in the estate’s final year which falls beyond the executor’s year should be taxed in the estate or in the beneficiaries’ hands also depends on the terms of the trust as discussed above. Where the income is distributed or made payable to the beneficiaries pursuant to the terms of the Will, the amount must be included in the beneficiaries’ income, unless a valid subsection 104(13.1) or (13.2) designation is made … .
(b) and (c)
CRA first noted that 2016-0669871C6, dealing with a simple will providing minimal direction to an executor, provided that “where there is no indication in the Will from which assets the gift is to be paid … the residue of the Estate can include income” so that “the income of the estate may be paid or made payable to a residual beneficiary,” generating a s. 104(6) deduction, but that no such deduction is available where the Executor may be “required to pay the taxes owing on the income generated by the Estate and distribute the after tax “residue” to the residual beneficiaries”. CRA stated:
Accordingly, the guidance provided in the latter part of paragraph 6 does not apply to every situation. Further … [such] guidance would also apply where the end of the estate’s tax year coincides with end of the executor’s year … .”