- A graduated rate estate (GRE) is taxed at the same graduated rates as individuals while it qualifies.
- An estate can be a GRE for up to 36 months after death.
- The estate must designate itself as the GRE in its first return for a year ending after 2015.
- On final wind-up, the final T3 and any balance owing are due 90 days after the final distribution.
After someone dies, their estate often earns income before it is fully distributed, such as interest, dividends or rent. Who pays tax on that income, and at what rate, can make a real difference to what is left for beneficiaries.
Estate trustees often hear about the graduated rate estate, or GRE. This article explains what it is, what has to be done to qualify, and how long the status lasts. It is general information, and an accountant or lawyer should confirm how it applies to a particular estate.
Why GRE status matters
Most trusts, including ordinary testamentary trusts, pay tax at the highest individual rate with no graduated brackets. A graduated rate estate is an exception. While an estate is a GRE, it is taxed at the same graduated rates as individuals.
For an estate that takes time to settle, that can mean less tax on income the estate keeps while it works through its tasks. Estate trustees must collect assets, pay taxes and debts, and distribute the remainder under the will and the law.
What it takes to qualify
Under the Income Tax Act, an estate is a graduated rate estate only if all of the following are true.
- It is no more than 36 months after the person's death.
- The estate is a testamentary trust.
- The deceased's Social Insurance Number is on its returns for each year ending after 2015.
- It designates itself as the GRE in its first return for a year ending after 2015.
- No other estate has designated itself as the GRE of that person.
The designation is easy to overlook. If the first return does not make it, the estate may not meet the test, so ask your accountant to confirm it is made.
The 36-month limit and year-ends
An estate can be a GRE for up to 36 months after death, and if it still exists after that, it ceases to be a GRE. After that point the ordinary trust rules apply, which means tax at the top rate.
A GRE has some flexibility on dates. Its first tax year-end can be chosen at any date up to one year after the date of death. It also has a deemed year-end on the day it stops being a GRE, which is no later than the end of the 36-month period.
| Item | Graduated rate estate | Ordinary trust |
|---|---|---|
| Tax rates | Same graduated rates as individuals | Highest individual rate, no graduated brackets |
| First year-end | Can be chosen up to one year after death | Not covered here; confirm with an accountant |
| Tax instalments | Exempt for 2016 and later years | Not exempt as a GRE |
| Section 164(6) loss carryback election | Available to a GRE | Not available |
Other benefits and the final return
Only a graduated rate estate is exempt from tax instalments for 2016 and later years. Only a GRE can make the election under section 164(6) of the Income Tax Act to carry certain first-year losses back to the deceased's final return.
On final wind-up of a GRE, the tax year ends on the final distribution of assets. The final T3 and any balance owing are due 90 days after that date.
Because the 36-month clock keeps running, estate trustees who can finish distributing within that period may avoid a stage where the estate loses its status. Whether that is practical depends on the estate, for example if there is a dispute or a hard-to-sell asset, so get advice early.
Not the same as a qualified disability trust
Another testamentary arrangement is also taxed at graduated rates: the qualified disability trust. It is elected on Form T3QDT and uses trust code 904. Each electing beneficiary must be named by the deceased in the instrument creating the trust and must qualify for the disability tax credit for the year.
A GRE is about the estate itself during its first 36 months. A qualified disability trust is about a trust for a beneficiary with a disability, so the two serve different purposes.
What to do next
- Write down the date of death and count forward 36 months.
- Confirm that the deceased's Social Insurance Number is on each estate return.
- Ask your accountant to make the GRE designation in the first return and to choose the first year-end carefully.
- Plan the timing of distributions with the 36-month limit in mind.
- Diarize the T3 due date, 90 days after the final distribution or year-end.
- Speak with a lawyer if a dispute or delay might push the estate past 36 months.
Frequently asked questions
How long can an estate be a graduated rate estate?
An estate can be a GRE for up to 36 months after death. If it still exists after that, it ceases to be a GRE.
Is the GRE status automatic?
No. Among other conditions, the estate must designate itself as the GRE in its first return for a year ending after 2015, and no other estate can have made that designation. Ask your accountant to confirm it is done.
Can I choose when the estate's first tax year ends?
A GRE's first tax year-end can be chosen at any date up to one year after the date of death. Which date is sensible depends on the estate's income, so an accountant can help.
When is the final T3 due for a GRE?
On final wind-up, the tax year ends on the final distribution of assets, and the final T3 and any balance owing are due 90 days after that date.
Sources
- Income Tax Act s. 122 (Justice Laws) — Justice Laws (federal)
- Income Tax Act s. 248(1) (Justice Laws) — Justice Laws (federal)
- CRA – Return of income for a graduated rate estate — canada.ca
- CRA – T3 Trust Guide — canada.ca
- Ontario – Administering estates — ontario.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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