TAXATION OF AN ESTATE
At the risk of sounding ominous, but continuing on with the deceased theme, this section discusses the tax rules for an estate.
Basically, when a person dies, their estate comes into existence at that time as a matter of law. In Quebec, the official term is a succession. To keep things simple, both will be referred to as an “estate” in this discussion, which is also the term used in the federal Income Tax Act.
An estate is considered a trust, a person, and a taxpayer under the Act. As such, if it earns income and owes tax, a tax return must be filed and the tax must be paid, as with any other taxpayer.
An estate is considered a testamentary trust. In most cases, an estate is considered a graduated rate estate (“GRE”) for the first 36 months of its existence as long as it remains a testamentary trust (more on this below). After 36 months, it is no longer a GRE and is treated like any other estate or trust.
There are advantages to GRE status.
The main advantage is the application of graduated tax rates to the GRE taxable income, being the same graduated tax rates that apply to individuals during their lifetimes. All other estates or trusts are subject to a flat tax rate at the highest marginal rate, which is 33% federally, and varies from about 49% to 54% when provincial taxes are added, depending on the province in which the estate or trust is resident.
Other advantages of GRE status include:
- The GRE can choose an off-calendar taxation year or a calendar taxation year (all other estates and trusts must use the calendar year);
- The GRE’s first $40,000 of adjusted taxable income is not subject to the “alternative minimum tax”, which can apply if it has significant tax breaks or amounts that are subject to preferential tax rules; and
- The GRE is not required to pay annual tax instalments.
After 36 months the GRE ceases to be a GRE and is simply an estate that does not qualify for the graduated tax rates and the other tax advantages. However, the GRE can cease to qualify before the 36 months in certain other cases. For example, if the estate ceases to be a “testamentary trust” because someone other than the deceased contributes property to estate (with some limited exceptions), then it ceases to be a GRE and from that point on will not qualify for the tax advantages.
On a final point, the CRA takes the position that a deceased can have only one GRE, even if the deceased has multiple wills and property in different jurisdictions.