Tax relief for an estate donation cannot be claimed until the property is transferred to a charity. No tax receipt; no tax credits. If the distribution is after 60 months after death of the donor there is no tax receipt at all. But what if the estate has illiquid assets that can’t easily be monetized, but may, possibly, be transferred in-kind to a charity?
Extended claim period
Formally, the tax rules addressed this issue. When the estate donation rules were first introduced in January 2016, they were aligned with the 36-month graduated rate estate (“GRE”) period. This made the claim period for donations the two final lifetime returns and the three GRE estate returns. Charities were concerned that they would be see the value of estate donations reduced if the claim period was missed. Delays are most often caused by litigation or illiquid assets. The Canadian Association of Gift Planners advocated for post-mortem transfer period to be extended from 36 months to 60 months. Its wish was granted.
Terminal T1 Liability
The extended claim period, however, only addresses part of the issue. It ensures, in most cases, that there will be tax relief for a charitable gift – which means more money for both charitable and human beneficiaries. The biggest tax bill typically falls in the terminal lifetime return. Tax is owing if the return is filed without a donation tax receipt. It may be recovered later after a refile, but at the very least interest is payable on the amount of tax owing.
Executors may wish to distribute assets in-kind to named registered charities in time for inclusion on the terminal T1. This is a simple matter if the property is public securities. In this case, there is also additional tax savings due to the elimination of the capital gains tax. The issue is messier with property such as private company shares, art collections, rural real estate, and mineral and energy rights. Collectively, these are example of “complex property”.
Complex property is difficult to transfer to charity, especially if there is more than one organization named in the will. Charities typically don’t have the expertise to accept, value and manage complex property. Complex property is also often difficult to divide. More fundamentally, executors traditionally think it is their responsibility to sell property and distribute cash to charity beneficiaries. Charities, the thinking goes, receive donations for immediate use, not undertake a lengthy monetization process – essentially acting as a second executor.
Charities as administrators of complex property
There are situations when these assumptions should be rethought. An estate plan may be structured to name a charity that will play an intermediary, administrative role. They combine this administrative role with carrying out the charitable purposes, either directly or through grants to other registered charities.
Fortunate donors of complex property are those that only naming one charity in their will that is sophisticated in the management of property. Most estate donors typically want to support several charities. Traditionally, private foundations have be used to serve this function for estates with complex property. Unfortunately, there are restrictions related to gifts of private shares to private foundations that create planning challenges.
More recently, certain public foundations with donor advised funds are acting as both recipient and administrator of complex property. Public foundations will typically be more able to accept and receipt private company shares than private foundations.
Again, it depends on the capacity of receiving public foundation. A charity that receives an estate donation of private company shares becomes a shareholder of the company. It’s not just a tax plan, but a multi-year relationship. Trust, experience, and governance are needed. When a foundation has this capacity, the tax and planning issues can be addressed. When absent, it is best for the executor to pay CRA interest charges and push to monetize assets within estate.