Matt Johnston, my tax colleague at Scotiatrust, says the 12-month tax filing deadline is upon us. The initial round of major distributions to charities will occur in January 2017 under the “estate donation” rules introduced in 2016. As mentioned in my previous blog, executors and their advisors are discovering that new rules create new procedures. And the new procedures may lead to faster distributions to charities.
Under the new estate donations rules, a gift by will is incomplete until the funds are transfer to the charity and a tax receipt is issued. By contrast, under old section 118.1(5) of the Income Tax Act, the gift was deemed to occur at death. The transfer to charity was unnecessary before filing the Terminal Lifetime (T1) return. Executors calculated the value of the gift and filed the first return without making a payment to charity.
Under the new rules, the executor will need a tax receipt to claim the charitable donation tax credit on the Terminal T1, as well as the penultimate T1 and T3 estate returns. Tax filings will be more accurate when a tax receipt is in hand, and this should reduce the incidence of refiling. It also makes for happier beneficiaries — because tax savings do that. The tax receipt requirement is expected to accelerate the fund transfer process.
This is great news if you work at a charity. You should update your correspondence to executors. It is helpful to remind them that early distributions will help make tax calculations and estate administration easier. Estates with easily liquidated assets will benefit most from the rules, and fortunately they are in the majority.
For executors, the task is more complex. Administrative efficiency will become a priority in order to get the estate in shape for distribution. Illiquid assets may delay the tax filing process and generate multiple filings. All in all, executors may find they are in a greater rush and have less margin for error. As a result, the value of professional estate administration is likely to be greater than ever.