Today’s blog is being written by Jonathan M. Charron, senior associate at Fasken’s Montréal office.
The tax rules applicable to charitable gifts on death have changed considerably since 2016. These new rules aim inter alia at providing more certainty as to the tax treatment of such gifts and more flexibility in terms of who, between a deceased and his or her estate, can actually claim a donation tax credit (“DTC”) resulting from a gift made in the context of a taxpayer’s death. Let’s review these rules.
Prior to 2016, there could be a debate as to whether a charitable gift made pursuant to the terms of a will was actually a gift made by will, for which the deceased was entitled to claim the donation tax credit, or whether it was a gift made by his or her estate, for which only the estate was entitled to claim the DTC. This determination depended upon the terms of the will and factors such as the level of discretion provided to the executors of the estate in making the gift.
Under post-2015 rules (applicable to deaths after 2015), this is no longer a debate because the Income Tax Act (Canada) (“ITA”) now includes a deeming rule that provides that the following gifts are deemed to be made by an estate (and not by any other taxpayer):
- Gifts made by an individual through his or her will,
- Gifts made by an individual’s estate, and
- Direct designation gifts (for e.g., proceeds of life insurance, RRSP, RRIF or TFSA transferred to a charity as a direct beneficiary).
The ITA further provides that such gifts are deemed to be made at the time of transfer of property by the estate to the donee, as opposed to the taxpayer’s time of death. This is relevant in determining the fair market value of property gifted and thus, the value of a gift for purposes of the donation tax credit, as this value may have shifted since the taxpayer’s death.
But who can actually claim the DTC for tax purposes? This is particularly important when considering that:
- The deceased will generally bear the tax liability on death on all accrued gains on assets personally held (unless a spousal rollover applies or the gifted property benefited from zero-rated capital gain treatment); and
- The gift is, for tax purposes, deemed to be made by the estate irrespective of the terms of the will or the fact that it arises from a direct designation gift outside of the will.
Post-2015 tax rules allow for flexibility in this regard. More precisely, DTC can be allocated among the following tax returns in order to maximize the benefit of the gift:
- Claimed by the estate:
- in the year of the actual gift;
- in any year prior to the year in which the gift is made (if estate is a “graduated rate estate” (“GRE”) for the year in which the credit is claimed – a GRE is generally an estate designated as such for tax purposes that arise on and as a consequence of death and that receives all and only worldwide property owned at death by the deceased taxpayer (as opposed for e.g., to a testamentary trust created by will who, technically, receives property from the estate and not from the deceased);
- carried forward by the estate for up to 5 years (10 years for gifts of “ecologically sensitive lands” as defined in the ITA); and
- If the estate is a GRE within a modified meaning that extends such status up to 60 months after death, DTC may also be claimed by the deceased’s individual:
- in his or her final personal tax return for the year of death; and
- in his or her personal tax return for the taxation year immediately preceding the year of death.
Accordingly, tax rules now applicable to charitable gifts on death provide an opportunity to plan and to administer the estate in a way to maximize the benefit of a DTC, by allowing the application of the DTC against income taxes payable by both the estate and the deceased taxpayer. However, particular rules have to be complied with, such as the timing of transfer of the property to be gifted. Otherwise, DTC may be trapped in the estate. This could be the case, for example, if a gift is made more than 60 months after death or if the estate receives an offside contribution. In these cases, the general DTC rules would apply to the gift, such that DTC could only be claimed by the estate in the year of actual donation or within the applicable carry forward period.
Finally, it is noteworthy that Canada Revenue Agency’s long-standing policy to allow the spouse or common-law partner of a deceased individual to claim DTC in respect of the deceased’s gift by will is no longer applicable since these tax rules were adopted in 2016.