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

author-image

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 beneficiaries”, include:

“Designated income”, includes income from:

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.

 

Insights

Read our recent articles

For your business and personal finances.

service-images

Authorizing GGFL as Your Representative with CRA

There is one simple, but important step business owners can take to help make their… Read more

service-images

2024 Federal Budget Highlights & Commentary

On April 16, 2024, the Deputy Prime Minister and Finance Minister, the Honourable Chrystia Freeland,… Read more

service-images

The Bare Facts on The New Bare Trust Reporting Requirements

BREAKING: Relief for Taxpayers as CRA Cancels Bare Trust Filing Requirements for 2023. CRA announced… Read more

green-chevron

Let’s Connect

Reach out today to discover the
opportunities behind your numbers

Contact Us
bordered-eclipse