In our last article, we outlined how estate freezes can be used to reduce a company’s capital gains tax liability as part of your estate. This is, of course, not the only strategy for proactively minimizing tax burden on your legacy. Let’s take a look at Canada’s “graduated rate estate”.
Overview & Advantages
Ever since 2016, estates and testamentary trusts in Canada have typically been taxable at the highest marginal tax rate. You can significantly reduce this tax burden by qualifying an estate as a graduated rate estate. This considers the estate as a testamentary trust, and if the GRE requirements are met, it allows a graduated marginal tax rate on the assets for up to 36 months after death. It also allows the estate to claim donation tax credits in the year the donation is made or for any of the following five years. One can even carry back donation credits to the deceased’s final tax return or to the tax return of the year prior to death.
Qualifying a GRE
To officially qualify an estate as a GRE, it must be designated as such on the tax return for the first year of the GRE’s 36-month lifespan and the deceased’s Social Insurance Number must be used on each tax return during that period. Keep in mind that although the 36-month limit may seem set in stone, a GRE can have a non-calendar end, which allows you to stretch the graduated tax rate benefits across a period of four tax years. While it was once possible to spread income across several GREs, the Liberal government has since modified the laws pertaining to this practice. Now, only one GRE can be set up per deceased individual.
As usual, certain caveats and pitfalls are important to bear in mind when leveraging the benefits of a GRE for an estate. For instance, if the estate loses its status as a testamentary trust, its status as a GRE will be lost as well. This can occur if the testamentary trust is named as a beneficiary of an inter vivos trust, if a person contributes to the trust, or if an asset within the trust is replaced with one that has a higher fair market value. Use of a GRE can become more complicated in the case of multiple wills or multiple testamentary trusts. Speak with an estate planning specialist to find out how you can best apply a GRE to your circumstances.
Tax planning is one of the most important parts of developing a stronger and more secure estate, but it’s only one of many areas that the estate planning experts at MacMillan Estate Planning can help you with. To learn how else we can enhance your wealth and legacy, call (833) 266-6464 today.