Written on November 21, 2014 – 9:40 am | by Katie Ionson
When the government released the 2014 Federal Budget last February, one buzzed-about change was the increased flexibility the Budget proposed for testamentary charitable donations.
Under the current rules, gifts by Will to charities are deemed to have been made by the deceased immediately before his or her death and may only be applied against tax arising in the last two taxation years of the deceased. S. 118(5) of the Income Tax Act deems a gift by Will to have been made by the deceased immediately before death.
The Budget proposed to extend the period in which these charitable tax credits could be applied, effective January 1, 2016. Under the proposed measures, gifts by Will will be deemed to have been made by the deceased’s estate at the time the gift is transferred to the charity. The executors of the deceased’s estate will have the ability to allocate the charitable tax credit arising from the donation among: (i) the estate’s taxation year in which the donation was made; (ii) an earlier taxation year of the estate; and/or (iii) the last two taxation years of the deceased. To qualify, the transfer of the gift to the charity must occur within 36 months of death.
On August 29, 2014, draft legislation was released for these changes. The draft legislation raises many questions and, in its current form, greatly restricts the proposed enhanced flexibility.
Significantly, the tax credit “carry back” discussed above will only apply if the estate that makes the gift is a graduated rate estate (a “GRE”). A GRE is a new concept. The draft legislation provides that a taxpayer may only have one GRE. This suggests that where multiple Wills are used, the executors will need to determine which “estate” should qualify as the GRE by designating itself as such in the estate’s first tax return.
If the gift is not made by a GRE, then the estate will have the ability to carry the tax credit forward for a period of five years, but will not be able to carry the tax credit back to previous years or apply it against the last two taxation years of the deceased. As a result, if a gift by Will is made using property that does not form part of a GRE, the executors could find themselves with less flexibility under the old rules than the new. Under the current rules, the credit could be applied against taxes arising in the deceased’s terminal year or the year prior. Under the proposed rules, no carry back would be available and the credit could only be applied against income of the estate.
Estate planners will now need to consider which estate is likely to qualify as the individual’s GRE (and/or include language providing the executors with flexibility to make the gift from either estate), in order to structure gifts by Will to ensure that the benefit of the tax credit is maximized.
 There are special rules that apply to determine whether a gift qualifies as a “gift by Will” for purposes of the Income Tax Act.
 There are several other issues and potential “traps” with the proposed legislation, but this blog post is too short to discuss them here.