It would be surprising how easily GRE status could be lost. We chatted about the benefits of establishing a Graduated Rate Estate on Monday. In estate administration, one must tread carefully to preserve the Graduated Rate Estate (GRE) status.
Let’s highlight this with a cautionary tale involving Jane and her late brother John’s estate. While laden with assets, John’s estate lacked the liquidity to settle its debts promptly. As the dedicated administrator of John’s estate, Jane decided to transfer $5,000 from her personal savings into the estate, hoping to facilitate its timely administration and secure a better financial future for John’s children.
However, Jane’s generous act unexpectedly jeopardized the estate’s GRE status. According to section 108(1) (b) of the Income Tax Act, a trust can lose its GRE status if a contribution is made by someone other than the deceased after the date of death.
The precedent set by the tax court in Greenberg Estate vs. The Queen clarified that Jane’s voluntary payment could be considered a “contribution”, defined as any voluntary payment made without any return meant to increase the estate’s capital.
Despite her good intentions, Jane’s actions threatened the beneficial tax implications of the estate’s GRE status.
Aware of the potential tax implications, Jane revised her approach, deciding not to gift money to the estate but to cover some of the estate’s liabilities personally as a loan. However, this well-meaning action was not without its potential pitfalls. As per section 108(1) (d) of the Income Tax Act, if a debt to a non-arms length party is not repaid within twelve months, it is considered a contribution, again threatening the estate’s GRE status.
Further complicating matters was an ‘inter vivos’ family trust established by John and Jane’s father, designed to divide its capital between John and Jane upon their father’s passing.
Unfortunately, their father passed away five months after John, leading to John’s share of the trust capital being added to John’s estate. According to an interpretation bulletin from the Canada Revenue Agency, such a post-death contribution could adversely affect the estate’s GRE status.
This story is a cautionary tale about the delicate nature of estate administration and how seemingly well-intentioned actions can inadvertently lead to losing beneficial GRE status.
It emphasizes the importance of thoroughly understanding tax laws or seeking expert advice when dealing with estates to prevent unintended tax implications and preserve the estate’s GRE status.
In setting the eligibility criteria for the Old Age Security (OAS) pension, Canada’s residence-based benefits system differentiates between full and partial pension recipients based on their length of stay in the country post-attainment of 18 years.