In 2016, the Department of Finance introduced the “graduated rate estate” (GRE). Since that time, any special relief in the Income Tax Act which applied to testamentary trusts now only applies to GREs. There are various advantages to an estate which is designated a GRE. One of the most significant benefits relates to testamentary donations.
What is a Graduated Rate Estate?
In order for an estate to be a GRE several conditions must be met. A GRE of an individual is:
- an estate that arose on and as a consequence of the individual’s death on or after December 31, 2015 and no more than 36 months after the person’s death;
- the estate at that time must be a testamentary trust;
- the estate designates itself as a GRE of the individual in its tax return;
- no other estate of the individual designates itself as a GRE; and
- the estate uses the individual’s social insurance number on each tax return during the 36-month period following the individual’s death.
General Gifting Rules
When a taxpayer makes a donation to a registered charity, that taxpayer is generally entitled to a tax credit. Usually, the credit can only be claimed up to 75 percent of the taxpayer’s income for the year and the credit can be claimed in the year in which the donation is made or in any subsequent five years.
In the year of death, the 75 percent restriction does not apply and the taxpayer can claim the donation credit up to 100 percent of their income. Moreover, the donation credit can be used against 100 percent of the deceased taxpayer’s income for the year immediately preceding death. The 75 percent restriction still applies to taxation years of the estate.
Gifts made by Graduated Rate Estates
The gift will be deemed to be made by the deceased’s GRE if the gift is deemed to have been made in respect of death (see above) or the subject of the gift is property acquired by the estate as a consequence of death or property substituted for that property.
If a gift is made by an estate and the estate is a GRE, the estate will have flexibility to:
- allocate the donation to any of the last two tax years of the deceased taxpayer (if the donation is allocated to the taxpayer’s last year, the donation can help shelter taxes payable on death);
- allocate the donation to the year of the donation or any of the subsequent five years of the estate;
- allocate the donation to any preceding year of the estate.
Advantages of Gifting by a Graduated Rate Estate
Simplified Donation Planning
Under the old rules, a gift made by a will was deemed to have been made immediately before the taxpayer’s death. The resulting donation credits could be used in the deceased’s terminal return or for the preceding year. A gift made by an estate (and not in a will) could not be carried back to the deceased’s terminal return. Generally, to be considered a gift by a will, the CRA required that the terms of the will required the executor(s) to make a specific gift of property and/or gift a specific amount or percentage of the residue of the estate. The executor would have little discretion with respect to the gift. Under the old rules, wills and estate plans had to be carefully crafted to ensure that the taxpayer entitled to claim donation credits was the same taxpayer with the tax liability. The new rules remove this level of guesswork and simplify drafting wills and estate plans (from a gifting perspective).
When an individual passes, they are deemed to have disposed of their assets to their estate for fair market value (FMV) and they must recognize any capital gain on their final return the adjusted cost base (ACB) to their estate becomes the FMV. If the estate is a GRE, it will have flexibility (see above) to allocate donations made by the estate.
In a technical interpretation, the CRA provided an example of how donation planning has been simplified and made more flexible. In the interpretation, the CRA reviewed several scenarios concerning a deceased who, on death, owned a mutual fund investment account with a fair market value of $4,000,000 and adjusted cost base of $1,000,000. Pursuant to subsection 70(5), on death the deceased was deemed to have disposed of the account to his estate for $4,000,000. The deceased recognized a capital gain of $1,500,000 on his terminal return and the ACB of the account to the estate was $4,000,000.
The CRA provided that if the executors donated $500,000 of the mutual fund units, the capital gain previously reported at the 50% inclusion rate would have to be recalculated and the final return amended. Further, if at the time of donation, the FMV of the units held by the estate increased in value over the ACB, the estate would recognize a capital gain but the inclusion rate would be 0%.
More Intuitive Valuation
Under the old rules, the CRA’s position was that the value of the gifted property was determined immediately before the taxpayer’s death. Now, the value of the gift is determined on the date the gifted property is transferred to the qualified donee. This will make it easier for donees to issue receipts.
 Federal credit is available under subsection 118.1(3) of the Income Tax Act, RSC 1985, c 1 (5th Supp). Generally, the taxpayer would be entitled to a provincial credit as well.
 Subsection 118.1(5.1).
 Subsection 70(5).
 CRA Views, 2017-0698191E5 “Gift of securities by executors of a will.”
 Paragraph 38(a.1)(ii).
 Paragraph 38(a.1)(i).
 Note, however, that a deceased is still deemed to have disposed of his/her capital property immediately before death for fair market value. As a result, planning will have to take into account a possible change in value from the date of death until property is gifted.