Written on January 22, 2013 – 6:17 am | by Malcolm Burrows
While the law on valuing residual gifts by will to a registered charity is clear, the estate administration process often makes it difficult for charities to provide compliant receipts. Sub-section 118.1(5) of the Income Tax Act states that a gift by will is “deemed to be made by the individual immediately before the individual died”. This is the value that is used by the executor when filing the terminal T1 tax return and should be supported by the charity’s tax receipt.
Here’s where timing plays a part. The terminal T1 must be filed either by April 30th of the year following death or within six months of death. Typically, the T1 is filed before any distributions are made to beneficiaries. In other words, the tax benefits are claimed before the property is transferred because the gift is deemed by the Act to be made.
It is often difficult for charities to determine the value of the gift per 118.1(5), although CRA is clear that the date of death value should be recorded on the receipt. If the residual share has declined in value, charity auditors and financial officers often find it problematic receipting property not received. If the share has increased in value, it is often difficult for charities to differentiate what portion of the distribution represents original capital versus income/gains that will be reported on T3 estate return.
Based on an informal survey of charities, the standard practice is to receipt the fair market value of each distribution as it is received. While this is technically incorrect, it appears to be widely accepted by executors and CRA. It also seems to be the preference of charity financial officers. The receipt provides proof of payment, but may not be filed with CRA. It is ultimately up to executor to claim the correct value of the gift on various tax returns — which is typically done before the charity receives the funds.