The 2016 introduction of the Graduated Rate Estate (GRE) regime was accompanied by the “estate donations” rules. These Income Tax Act provisions altered the administrative and tax treatment of gifts by will, as well as direct designation gifts of life insurance, RRSP/RRIFs, and TFSAs. How are charities and executors managing with these rules six and a half years later?
I’d say the experience is mixed.
Estate Donation Features
Let me focus on gifts by will. The “estate donation” provisions changed fundamental attributes of gifts by will.
- A gift is deemed to be a donation of the estate, not of the donor during his/her lifetime.
- The number of returns on which a donation tax receipt may be claimed increased from two (final lifetime T1 returns) to up to seven (final two lifetime returns and five estate T3 returns).
- In the old regime, gifts were deemed to occur just before death at the same time as the deemed disposition of taxable property. Previously, gifts could be claimed without property being transferred to the charity. In the new regime, the executor needs to transfer funds to the charity, which then issues a receipt for fair market value. The tax receipt is filed by the executor to claim the donation tax credits for the estate.
- Under the old regime, there was no effective limit on the claim period. Under the new, the donation must be received 60 months after the date of death or it cannot be claimed.
I spoke to a few charities and executors to find out their experience with the estate donation rules. There are a few practical issues that have emerged:
- Executors are making larger distributions to charity upfront in order to file the tax receipt on the terminal T1, which in some situations eliminates all tax owing. Failure to do so mean there may be a significant tax liability in the T1. Charities appreciate this sense of urgency, as money is received faster.
- Executors are facing pressure to distribute illiquid in-kind property to charity quickly. Examples of illiquid property include private company shares and art. Again, the goal is to get immediate tax relief, but that assumes the charity capable of receiving the property in-kind. In one case, the urgency to distribute property inkind was due to the closing of the 60-month distribution window. After 60 months, the donation would not be eligible for any tax relief.
- One charity, which had a 100% residual interest in an estate, reported that an executor had to be pushed to refile tax returns after the initial distribution gift had been made after two years. The result was $300,000 a tax refund for the charity. (Charities, make sure executors file tax receipts, otherwise you may be leaving money on the table.)
- The same charity with the residual bequest also reported experience with the “estate donation loop”. That is, every distribution triggered a donation tax receipt necessitating the refiling of T1s and T3s. Every refiling generated more funds for distribution to the charity. In this case, the loop process happened three times before everyone decided enough is enough.
- The once popular “donate to eliminate” will clause is broken. This clause provided the executor with discretion to donate just enough to charity to eliminate (or mostly eliminate) the tax on the terminal T1. Due to the estate donation loop and the effect of refiling, there is no single formula that enables the executor to make a single discretionary donation to offset all taxes.
These are just a few issues that have emerged with the estate donation regime. If you have more stories to share, please leave a comment. It would be helpful to hear what others are experiencing.
Rowena GriffithsAugust 18, 2022 - 3:58 pm
Thank you for this synopsis. I often share articles with executors and donors on GRE’s this is another great one for sharing…it also assists practitioners on the charitable side of the reality and opportunity.
“you don’t know what you don’t know” is so true about GRE’s…informed decisions are the result of educating ourselves, executors, donors and allied professions we work with.
Malcolm BurrowsAugust 18, 2022 - 5:38 pm
Rowena – Thanks for your comments and support. I think there is still a lot of learning going on in this space. Charities have an important role in making sure things get done right and all the funds intended for charity are received. Malcolm
Yolanda BenoitAugust 18, 2022 - 5:39 pm
Excellent article, Malcolm. Thank you!
I agree wholeheartedly with Rowena’s comments. My team saves great articles, like this one, to share and educate others. This is an ever-changing, exciting field and there is always something new to learn from experts like you, Malcolm.
We always include a question in our very first letter in response to being a beneficiary in a donor’s will: Will they be filing the first T3 as a Graduated Rate Estate? Whether or not they reply to this question gives us some indication as to whether or not they need more education on the topic. Filing as a GRE will benefit our charity as a residual beneficiary so we want to ensure they do file as a GRE.
We follow up until we receive an answer and then can help educate if they do not know what it is. Some of the executors put us in touch with the estate accountant, which is fantastic!
Again, thank you for great articles such as this that we can share and help educate others!
Malcolm BurrowsAugust 18, 2022 - 5:58 pm
Hi Yolanda – Thanks for the contribution. This is a great suggestion to start the collaborative process with the estate. Are you finding executors who are not filing the estate as a GRE? Also, for residual bequests, do you request/suggest that the estate make an initial larger distribution in time to include on the terminal T1? Malcolm
Yolanda BenoitAugust 18, 2022 - 6:31 pm
Yes, we are finding some executors that are not filing for the GRE to our detriment. Some of them are advising us to contact the accountant, which we do, because the executor has stated that this was not his field of expertise and why he hired an accountant. Some of these accountants, after multiple attempts at reaching them, do not respond to us. Now that we have this fantastic follow up article on the GRE, I think in such cases we will simply forward these articles to them, even though they haven’t responded to us. This way, we are doing what we can to do our due diligence.
When it comes executors making larger initial distributions, we find that the response from executors is that the distribution amount has been recommended by their accountant. The accountant is the professional advisor and we find it difficult to shed light on various Estate Admin topics with executors once their professional advisor has told them something. Malcolm, if you have any suggestions in this area, they would be greatly appreciated.
Malcolm BurrowsAugust 18, 2022 - 8:50 pm
Yolanda – Great experience. I may need to write another article about the importance of distributing donations before the Terminal T1 is filed so the estate’s tax liability is reduced or eliminated at the front end. Malcolm
JaniceAugust 18, 2022 - 8:48 pm
Great article Malcolm, thanks!
One issue that has come up that I know about is a woman who has an art collection. The accountant has said that the capital gains (any property that is not a principle residence too) is due immediately on the personal return of the deceased. Once the art is donated by the Estate and receipted and the filing of the T3 return happens, the tax benefit / credit back to the estate may be long past the capital gains owing.
Of course, the payment of capital gains need not be paid immediately, but interest will be charged on the outstanding balance owing. The filings and timing can be problematic for some individuals, and executors now charged with settling estates.
Malcolm BurrowsAugust 18, 2022 - 9:00 pm
Hi Janice – Great share. The accountant is right, but not entirely. The capital gains owing on that art is triggered by death. If the terminal T1 is filed without a donation receipt for the art (or other property) included, a tax liability will be owing. The art collection (or other property) can be donated later and the T1 can be refiled to recover the tax paid (or offset the pending liability). I’m hearing a few stories about executor not refiling T1s and T3 after tax receipts are received. This means charities and other beneficiaries are getting net proceeds (after tax) not gross proceeds (with tax savings factored in). Something to be vigilant about. And definitely problematic. Malcolm