Principal Issues: Where an individual dies after 2015, is it possible that graduated rates may apply to four taxation years of an estate that has been designated as the graduated rate estate of that deceased individual?
Position: Generally yes, where an executor chooses a taxation year end for the graduated rate estate which results in a first taxation year which is less than 12 months.
Reasons: The fourth taxation year of the estate will be deemed to end when the estate ceases to be a graduated rate estate. Therefore, the fourth taxation year will also be a short taxation year. The estate will be subject to graduated rates only for a total of 36 months, even though the 36 months is spread over four taxation years.
STEP CRA Roundtable June 18 2015
Question 1. Graduated Rate Estate-Taxation Year
A graduated rate estate (GRE) obtains graduated tax rates for a period of 36 months. Can CRA confirm in the example below that a graduated rate estate can obtain graduated tax rates for up to four taxation years?
Suppose an individual dies on March 31, 2016. The executors adopt a first year-end of September 30, 2016. The second year-end is September 30, 2017. The third year-end is September 30, 2018. Lastly, a year-end is deemed to arise on March 31, 2019 (36 months after death), which is the last taxation year during which the testamentary trust is a graduated rate estate. Thereafter, it is required to adopt a December 31 year-end and for that taxation year and all following taxation years will not obtain graduated tax rates.
The result of selecting a short year-end for the first taxation year is that in four taxation years during the 36 month period graduated tax rates should be available. Does CRA agree?
CRA Response
The definition of a graduated rate estate (GRE) in subsection 248(1) of the Act is effective on December 31, 2015. In the above scenario where an individual dies in 2016, the first taxation year of the estate that has been validly designated as the GRE begins on the day after the individual dies and ends at any time the executor selects within the next 12 months. Assuming the estate otherwise meets all the conditions to be the deceased individual's GRE throughout the first 36 month period, where the executor chooses to have a short first taxation year end for the estate the 36 month period would span four taxation years.
In the scenario provided, the first and fourth taxation years are less than 12 months long, and the estate would be subject to tax based on the graduated tax rates for individuals for the first four taxation years as indicated.
2015-057213
William King