All About Estates

Charitable Donations by Graduated Rate Estates – Substituted Property

The new Canadian tax rules concerning charitable donations of graduated rate estates restrict those donations to gifts of properties acquired by an estate as a result of the death of an individual or of properties substituted for those properties.

The Canada Revenue Agency (CRA) was asked if the cash dividend received by the estate or cash received by the estate for the cancellation of shares would be considered a substituted property in the following set of facts:

• An individual dies after 2015, holding shares in an investment holding company (“Holdco”) owning marketable securities with a fair market value exceeding the adjusted cost base.
• He or she has a will providing for a charitable donation to be made after his or her death.
• His or her graduated rate estate provides for the donation of Holdco’s marketable securities or of cash from the sale of those securities.

Situation #1 – Holdco pays a cash dividend to the estate

In this situation, Holdco sells the securities and pays a cash dividend to the estate. The cash is then used to make the donation. If Holdco pays the dividend to the estate, the estate does not replace the Holdco shares received as a result of the individual’s death, and the cash received is not a substituted property meaning that the estate would not get tax relief for the cash donation.

Situation #2 – Holdco redeems shares from the estate
In this situation, the estate transfers the Holdco shares to the new company, Newco (i.e., on a tax-deferred basis), in exchange for Newco shares with a high paid-up capital (“PUC”). Holdco is wound up, and Newco enjoys a bump in the adjusted cost base. Newco sells securities, using the proceeds to redeem its shares from the estate which then uses the cash received from Newco to make a charitable donation.

When the estate gets Newco shares in exchange for the Holdco shares, the Newco shares become a substituted property, and when Newco redeems its shares from the estate, the cash received from Newco also becomes a substituted property for the Newco shares. The cash received by the estate upon the cancellation would be considered a property substituted for the Holdco shares as a result of the individual’s death, thus avoiding the rules that restrict the tax relief for the donation.

The new graduated estate rules that took effect on January 1, 2016 will require a review of one’s will to avoid restricted donation rules.

About Derek de Gannes
Derek A. de Gannes: Director, Domestic & International Tax of RSM Canada. RSM Canada is committed to the highest level of integrity, quality and professionalism and provides clients with solutions in the area of Audit, Tax and Transaction Services. Email: