Graduated Rate Estates – New Rules for 2016
Starting for 2016 taxation years, inter vivos trusts, trusts created by will and certain estates will be subject to the top taxation rate. There are two exceptions to this change: graduated rate estates and qualified disability trusts.
Graduated tax rates will still apply to these types of estates and trusts.
Income earned and retained in a graduated rate estate will be taxed at graduated rates
A graduated rate estate (“GRE”) is an estate that arose as a consequence of an individual’s death if no more than 36 months has passed since the date of death.
Graduated rate estates must have the following conditions:
- The estate must be considered a testamentary trust for tax purposes;
- The estate must designate itself as a graduated rate estate on its trust return in its first taxation year that ends after 2015;
- No other estate can have designated itself as the GRE of the individual; and
- The estate must provide the individual’s Social Insurance Number in its trust return for each taxation year of the estate after 2015 and during the 36 month period after the death of the individual.
Example: On May 1, 2013, Mr. Smith died and an estate arose. The estate is a testamentary trust for income tax purposes because it arose as a consequence of Mr. Smith’s death. Graduated tax rates will apply to the trust until December 31, 2016.
Graduated income tax rates:
Income earned and retained in a graduated rate estate will be taxed at graduated rates, similar to our personal income tax brackets and rates.
Calendar year end:
Only graduated rate estates will be able to have non-calendar taxation years.
Testamentary trusts that do not already have a calendar taxation year will be deemed to have a December 31, 2015 year end unless the trust is an estate that exists at the end of 2015 and is a graduated rate estate for the 2016 taxation year.
Graduated rate estates will be deemed to have a taxation year end on the day on which the estate ceases to be a graduated rate estate. Subsequent taxation year ends will be on a calendar year basis.
Using the example above, the estate will be able to have May 1 as its year end until December 31, 2015. On this date, the GRE rules will come into effect and the estate will have to decide whether or not to designate itself as a GRE. Assuming the estate is designated a GRE, the estate will qualify as a GRE until May 1, 2016 and will keep its original fiscal period of May 1 until that date. Beginning May 2, 2016, the estate will cease to be a GRE. A new taxation year will begin on May 2, 2016 and end on December 31, 2016. Subsequent taxation year ends will be on a calendar year basis or December 31. Also, the December 31, 2016 tax return will be subject to top taxation rates.
For more information on the taxation of graduated rate estates or trusts in general, please contact us at 780.466.6204, or click here to send us an email, or visit the Canada Revenue Agency website.
Thanks to Shannon Warawa of KWB Chartered Accountants for providing this content.
Shannon Warawa, CPA, CA
Shannon completed her Bachelor of Commerce from the University of Alberta in 1999. She articled with PricewaterhouseCoopers and Howard Kirkpatrick Associates and obtained her CA designation in January 2004.
Since joining KWB in September 2005, her role has evolved from preparer to manager and mentor. She takes pride in sharing her knowledge with junior members of the KWB team and watching their confidence grow as they gain experience.
Shannon is a member of the KWB Manager Team. She is also the first point of contact for the majority of clients handling the affairs of a deceased parent or spouse.
Shannon is married to her high school sweetheart. After 30 years they still make each other laugh. She has 3 children – an angelic daughter and 2 spirited sons. She loves spending time with family and hosting holiday and birthday gatherings.
Shannon has volunteered for the Heart and Stroke Foundation and served as Parent Council Treasurer for many years at her children’s elementary school as well as team treasurer for her sons’ hockey and lacrosse teams.
Away from work, Shannon enjoys summer camping trips to B.C. where her and her family like checking out local farmers’ markets, playing cards on the beach, and hiking to nearby waterfalls. She also enjoys reading and book club, cheering at her children’s sports games, and her weekly boot camp classes.