An “Exit Benefit”: Donation Contribution Limit at Death

Written on May 6, 2013 – 6:14 am | by Malcolm Burrows

In a recent seminar, Elena Hoffstein of Fasken Martineau charmingly described the deemed disposition of capital and other taxable property at death as an “exit penalty”. You die; you pay. The flip side of the penalty is an “exit benefit” for charitable giving, which is the contribution or claim limit for charitable donations in the year of death.

The contribution limit increases to 100% of net income in the terminal tax return from 75% for lifetime donations. Rather than the five-year carry-forward period, unused receipts may be carried back and claimed against 100% of net income on the penultimate lifetime (T1) return. Depending on the amount of the gift, it is possible to offset all taxes at death, including those triggered by the aforementioned exit penalty. Canada has the highest contribution limit in the world.

Most discussion of the contribution limit in the year of death focus on gifts by will, as well as direct designation gifts of life insurance or registered plans, such as RRSPs and RRIFs. These gifts are often planned to offset the deemed disposition.

The terminal year 100% contribution limit also applies to situations where the recently deceased taxpayer has made a large donation in life that is being carried-forward. Imagine a donor who makes a major late-in-life gift. It is so sizeable that it needs to be claimed over four taxation years at the 75% contribution limit. The donor dies in year two without claiming the full gift. Fortunately, the 100% contribution limit applies to the gift in the year of death, making it possible to salvage tax credits that would otherwise be lost. Even without a gift by will, the “exit benefit” can assist.

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