Canada: Donating By Will

There are many reasons to give to a charity: a personal relationship with a particular charity, a sense of social responsibility, the need to help others less fortunate, or wanting to give back to the community. Studies have shown that in addition to benefiting the community, the act of giving could increase the wellbeing, self-esteem and reputation of the donors themselves.

Because charitable giving can affect the disposable income and savings of donors, donors may not be able to donate the amount they would like. For donors who would like to donate larger amounts but can't afford to do so during their lifetime or who wish to leave a legacy after their death, a donation can be made through a declaration in a Will.

The advantages of making a donation in this manner, is that the general income limitation (i.e., the maximum amount of donations that may be claimed in a year is generally limited to 75% of the donor's net income) does not apply; 100% of the donations made in the year of the donor's death and the immediately preceding year can be claimed in those years. The donation(s) are also deemed to occur in the donor's terminal year therefore, a donation tax credit can be claimed on the donor's final tax return even though the actual donation may occur during the administration of the estate. Furthermore, any excess donations may be carried back to the year prior to death.

Making a donation through a Will however, does have its drawbacks. For example, the donor will not be able to benefit from any tax savings during his/her lifetime or be able to witness the benefit his/her donation provides. Also, the executor may not be able to claim the full tax credit available if the donor has a low level of income because the death occurred early in the year (this also assumes the preceding year's income was low).

With respect to the last item, the 2014 federal budget, proposes to provide some relief by allowing more flexibility to executors to apply donation credits. If the proposals are accepted, donations made by Will (and designated donations) will be deemed to have been made by the estate at the time at which the property is transferred to a qualified donee and the executor will then have the flexibility of claiming the donation in the year in which the estate makes the donation, an earlier taxation year of the estate or the last two taxation years of the deceased individual/donor. To qualify, the donation must be made within the first 36 months following the individual's death. The changes are expected to apply to donations made by Will or designation donations for deaths that occur on or after January 1, 2016.

Thus, donations can now be used to reduce the taxable income of the deceased individual in a manner most advantageous to the estate. Hopefully, this encourages people to consider making a donation as part of their estate planning.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.