More Fallout from the Graduated Rate Estate (“GRE”) Tax Rules

Gavel on Trust and estate planning document

More Fallout from the Graduated Rate Estate (“GRE”) Tax Rules

By Deanna Muise, CPA, CA, TEP, Tax Partner, KRP, Kingston Ross Pasnak, LLP

Estates and trusts created through Wills (“Testamentary Trusts”) are now divided in to GRE’s and non-GRE’s. GRE’s enjoy graduated tax rates for a three-year period and then become non-GRE’s. Generally, any income taxed in a non-GRE estate or trust is subject to the highest personal tax rates AND a calendar year-end must be adopted.

Prior to 2016, Part XII.2 tax did not apply to Testamentary Trusts and was, in fact, rarely a consideration. With the dawn of GRE and non-GRE estates/trusts, these rules are now very much an issue for many non-GRE trusts. In circumstances where the trust has at least one “designated beneficiary” and earns “designated income” which is paid or payable to any beneficiary, Part XII.2 tax applies at a rate of 40% of the lessor of:

  • “Designated Income” of the trust;
  • The trust’s total income prior to deductions for amounts paid or payable to beneficiaries; and
  • 100/60 of the amounts deductible from the trust’s income as paid or payable to beneficiaries.

“Designated beneficiaries”, include:

  • Non-residents of Canada;
  • Charities, Not for Profit organizations and First Nations (some exceptions apply); and
  • Certain other entities that act as intermediaries for the above two.

“Designated income”, includes income from:

  • Canadian real estate, timber or other resource properties (both income and capital gains);
  • Income from gains on shares of corporations that derive their value from Canadian real estate, timber or other Canadian resource properties;
  • Businesses operated in Canada; and
  • Certain other gains that may result from complex emigration planning.

This tax is applicable if any amount is paid or payable to ANY beneficiary, even to the Canadian resident ones; however, there is a tax credit available for the Canadian resident beneficiaries.

It is becoming more and more frequent for the children or grandchildren of Canadians to move to the US for employment purposes. If a child or grandchild (or anyone else) is a beneficiary of your estate and they reside in the US (or any other country), then these rules may very well apply to your estate if the estate carries on a business or earns income or capital gains from Canadian real estate or resource properties held directly or indirectly through a corporation.

A common example: you leave your principal residence to your estate that rents the property out and/or sells the property for a gain subsequent to the estate being a GRE (i.e., generally if the estate carries on for more than three years). If one of the children or grandchildren that are beneficiaries (or any other beneficiary) is living outside Canada, then the estate is subject to these rules and may have to pay the tax. In circumstances where amounts are not paid or payable to any beneficiaries, these rules will not apply. Note that the terms of your Will govern whether or not options exist to tax the income in the trust.

As the costs of this tax can be significant, it is strongly recommended that in circumstances where your beneficiaries are or may become non-residents of Canada, your Will be reviewed to ensure your executors/trustees have the flexibility to retain income in the estate/trust in cases where it is beneficial to do so.