Recent updates to Canada’s Income Tax Act provide greater flexibility for executors to allocate deductions for charitable gifts between the deceased herself and her estate. These new rules provide a valuable tool from an estate planning perspective. In addition, they also clear up certain areas of confusion under the old legislation. These updates come into effect in 2016 and are discussed below.
Under the old rules, which will remain in effect for 2015, there was a distinction as to whether the deceased had made a gift by will or whether it was by the estate. One example would be where the will gave discretion to the executors as to the quantum of the donation. Another would be where the will provided discretion to executors as to which charity (or other qualified donee) received the donation. The question in these circumstances was whether the gift was truly made by will, and thus by the deceased, or by the estate itself.
Timing was also an issue. In these circumstances, is the gift made on the death of the individual or at the time the property itself was transferred?
The new rules resolve these issues definitively.
The focus of the new legislation is the time at which the property is transferred. If the gift is made by will, by the estate or by a qualifying beneficiary designation under a RRSP, RRIF, TFSA or life insurance policy, then the donation is deemed to have been made:
- at the time the property is transferred and not at any other time; and
- by the estate and not the deceased or any other individual.
Previous concerns about gifts being subject to a formula or discretion to the trustees as to the objects of the donation are thus no longer relevant.
Consider a will which provides discretion to the executor of the estate as to the quantum of a donation and the charity which is to be the object of the donation. Pursuant to this power, the executor chooses to donate $10,000 to The Canadian Red Cross Society, a registered charity, during the first year of the estate. The result under the new rules is that this donation is deemed to be made (1) by the estate and (2) during its first taxation year.
The result is precisely the same if the $10,000 donation is expressly made by will and the property is transferred during the first year of the estate. In other words, the result is that this donation too is deemed to be made (1) by the estate and (2) during its first taxation year.
The flexibility in allocation discussed earlier revolves around whether the estate is a “graduated rate estate” (“GRE”) under the Income Tax Act. Most estates will be GREs for the first three years of their existence, but can be excluded from this definition if they cease to be a “testamentary trust” under the Income Tax Act, perhaps because of a contribution to the capital of the trust otherwise than as a consequence of the death of the deceased.
Though a full discussion of GRE requirements and pitfalls is outside the scope of this update, access to graduated rates for the first three years of an estate’s existence also depends on the estate being a GRE, so care should be taken to obtain tax advice before providing any funding to an estate or otherwise taking an action that might jeopardize its status as a GRE.
If an estate is a GRE, the executor has the flexibility to allocate the gift deemed made by the estate to any of the following taxation years:
- to the deceased in her year of death;
- to the deceased in the year before her year of death;
- to the GRE in its first year;
- to the GRE in its second year; and
- to the GRE in its third year.
In addition, the typical 5 year carry-forward for all gifts remains in effect.
If you are interested in receiving advice on these or other tax matters, please do not hesitate to contact the author at firstname.lastname@example.org.