The Budget introduces a significant change in the tax treatment
of gifts made under a Will or beneficiary designation.
Under the current rules, where an individual makes a donation by
Will, the donation is treated as having been made by the individual
immediately before the individual's death. Thus, the tax
credits arising from the gift are applied to the donor's final
tax return. Where the full credit cannot be used on the
donor's final return, the excess credit can be carried back and
used against the previous year's income. The tax credits
that arise on gifts made by Will are available only against the
individual's last two years' income – they cannot be
used to reduce tax that arises in the estate following the
By contrast, where a gift is directed to be made by the
donor's estate, the gift is available only against the
tax that would otherwise be payable by the estate. Estate
gifts cannot be used to reduce the donor's income in the year
of death or the prior year. Distinguishing between gifts by
Will and gifts by an estate requires an analysis of the terms of
the Will and the extent of discretion that is afforded to the
executors. As we have discussed in past
Newsletter Issues, determining whether a particular gift is a
gift by Will or a gift by the estate is not always easy, and the
tax implications can vary significantly depending on the
The Tax Act also applies similar rules where an individual
designates a qualified donee as the beneficiary of proceeds on
death under an RRSP, RRIF, TFSA or life insurance policy. In these
circumstances, the tax credit is available only against the
individual donor's last two years' income.
The Budget proposes to provide flexibility with respect to the
tax treatment of these gifts, where they occur as the result of a
death after 2015. Rather than deeming gifts by Will and gifts
by direct designation to have been made immediately before the
individual's death, they will be treated as having been made by
the estate. The gift will be deemed to occur when the
property is actually transferred to the charity. Executors
will then have the discretion to allocate the available tax credits
against any of the following:
the taxation year of the estate in the year the gift was
any earlier taxation year of the estate; or
the last two taxation years of the individual prior to
The Budget confirms that the current requirements for
determining whether an RRSP, RRIF, TFSA or life insurance policy is
a direct designation will continue to apply. Generally, this
means that the transfer of property to the estate must occur as a
consequence of the death of the donor, and must occur within 36
months of death.
This set of changes is welcome in that it provides significant
flexibility to executors and trustees when dealing with the taxes
incurred by a deceased individual and the individual's estate
upon death. While the Budget does not include specific
legislative language to implement this change, it appears that the
executors and trustees will be able to allocate tax credits between
the estate and the deceased individual.
The new rules also reduce the legal significance of the
distinction between gifts by Will and estate gifts, but they do not
eliminate this issue. It appears from the Budget document
that the new flexibility to allocate tax credits to either or both
of the estate and the individual is only available where the gift
constitutes a gift by Will. Thus, where the ability to
allocate is significant, it will be necessary to determine whether
the gift constitutes a gift by Will. However, the increased
flexibility will mean that the trustees can use either type of gift
against the estate's tax, thus avoiding the need to analyse the
nature of the gift where it is sufficient that it can be used
against the taxes arising in the estate.
This measure will apply to the 2016 and subsequent taxation
years. It will be interesting to review the details of the
legislation when released. Only then will we be able to
determine the scope of the new flexibility more definitely.
Although the proposal as announced is one that will be welcomed by
the sector and estate planners, it is not clear whether the Budget
proposals will deal with issues that can arise with the
availability of tax credits for donations made from a
spousal testamentary trust on the death of the spouse
beneficiary. It is hoped that the legislation in its final
form will address this issue.
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).