Written on March 3, 2014 – 6:00 am
| by Malcolm Burrows
Sometimes there are pleasant surprises in Federal Budgets. The 2014 version, which was delivered on February 11, contained a subtle but profound change to the tax treatment of estate donations. This change apply to gifts by will (bequests), direct designation gifts of RRSPs, RRIFs, and TFSAs; and gifts of the death benefit of life insurance policies.
As of 2016, estate donations will no longer be deemed to be made immediately before death. Instead, the donation will occur when the property is transferred to the charity. The charity will issue a fair market value receipt for the donation based on value at date of transfer, if the transfer occurs within 36 months after death. The donation may be claimed in three periods: 1) the taxation year of the estate in which the donation is made; 2) an earlier taxation year of the estate; and 3) the final two lifetime tax returns.
Under the current rules gifts by will and related direct designation gifts are deemed to be made immediately before death per subsection 118.1(5) and its related provisions. The donation may be claimed against 100% of net income on the previous two lifetime tax returns. Charities provide a tax receipt for the date of death value of the donation, not the value of the property transferred.
So what’s the difference? Although the proposal is not yet fleshed out there are a number of planning implications that are immediately apparent for estate donors.
1. More claim room. The claim period for estate donations has increased, which will lead to additional tax savings in many situations. The estate trustee will have flexibility to claim an estate donation over up to five years, up from the current final two (T1) lifetime returns.
2. Clear valuation. Charities now have clarity about the fair market value of estate donations for tax receipting purposes. The tax receipt is issued based on the fair market value at time of transfer with the 36 months after death.
3. Executor discretion. The new rules will probably allow more executor discretion related to choice of charities and the value of the donation, as long as the donation is made within 36 months of death. Canada Revenue Agency’s administrative positions on executor discretion may no longer apply.
4. Holdco gifts. Estate donors with investment holding companies currently face the risk of double taxation due to a mismatch of liabilities and credits/deductions in the terminal return and estate return. Some affluent individuals have chosen not to make estate donations to avoid an unfavorable tax result. The proposal appears to address this mismatch and to provide donors with a greater measure of planning certainty.
5. Mismatch risk. The new rules for estate donations may disadvantage estates where the value of the charitable bequest at date of death is greater than the value available to be distributed within the 36 months after death. In other words, in certain circumstances, the donor may have a tax liability that is greater than the offsetting credits. The deemed disposition of capital property at death will still apply.
6. 36 months. The introduction of the 36-month eligible distribution period after death will bring urgency to the administration of estates. This 36-month period is mirrored in new rules related to the tax treatment of testamentary trusts.
7. Testamentary Trusts The new rules do not address the tax treatment of gifts from testamentary trusts, including charitable remainder trusts (CRTs) eligible for a tax receipt. The current CRA position on testamentary CRTs eligible for a tax receipt at date of death, however, will likely no longer apply.
These are preliminary thoughts on the estate donation proposal. It is going to take a few years for donors and their advisors to figure out the full implications, but on the whole the changes are positive and will benefit philanthropy.
Tags: 2014 Federal Budget, estate donations, estate planning, Malcolm Burrows, Philanthropy