Delaying the Settlement of an Estate to Save Tax: A Good Idea or a False Economy?

When an estate qualifies as a graduated rate estate (GRE), it can temporarily benefit from the same graduated income tax rates as an individual. It may therefore be tempting to delay settling the estate to take advantage of these benefits for as long as possible.

However, this strategy is often less advantageous than it appears. In most cases, the tax savings are limited, while the risks for the estate liquidator can be significant.

What Are the Tax Benefits of a GRE?

During the 36 months following a death, a GRE may benefit from certain tax advantages that are normally available to individuals, including:

• Graduated income tax rates;

• The ability to choose its fiscal year-end;

• An exemption from minimum tax;

• No requirement to make tax instalment payments.

These measures can reduce the tax payable on income earned by the estate. This is why some liquidators may wonder whether it would be preferable to delay distributing the estate’s assets to the heirs.

Why Are the Tax Savings Often Limited?

In practice, the tax benefits are often modest. Most estates are settled within 18 to 24 months, which allows time to pay outstanding debts, file tax returns and obtain the necessary authorizations.

In addition, funds held by an estate are generally invested in conservative, short-term investments that generate little income. The income earned is therefore often insufficient to produce significant tax savings.

Heirs also generally expect to receive their share of the estate within a reasonable period. It is uncommon for a substantial amount of capital to remain invested long enough for the tax advantage to become genuinely worthwhile.

Be Mindful of the Liquidator’s Responsibilities

The liquidator is responsible for administering the estate prudently and settling it within a reasonable period. Intentionally delaying the distribution of assets solely to obtain a tax benefit can increase the liquidator’s exposure to liability.

In some cases, seeking a higher return may also require investing in riskier assets. If these investments result in losses, the liquidator may be required to justify their decisions to the heirs, particularly if the heirs were not properly informed of the risks.

What the Tax Authorities Monitor

The tax authorities have indicated that an estate should not be maintained artificially solely to extend access to graduated income tax rates.

When the settlement of an estate is essentially complete and funds are simply being retained by the estate, there is a risk that the income could be considered to already belong to the beneficiaries. The intended tax benefit could then be challenged.

There Are Exceptions

Certain circumstances may justify a longer estate settlement period, particularly when the estate holds shares in a private corporation, complex real estate that must be sold, assets located outside Canada or assets involved in litigation.

In these situations, the delay results from a genuine need rather than a tax objective.

Need Advice on Settling an Estate?

The tax benefits available to a GRE can be valuable, but the duration of the estate settlement process should primarily be guided by the estate’s legal, tax and administrative circumstances—not solely by the pursuit of tax savings.

Are you acting as an estate liquidator, or are you the heir of an entrepreneur? Before making a decision that could have significant tax consequences, make sure you assess all its potential impacts. Mallette’s specialists can help you evaluate the tax consequences of your situation and identify the strategies best suited to your circumstances.