On August 29th, the Department of Finance released draft legislation to implement changes proposed in the 2014 Budget with respect to charitable bequests. Other changes proposed in the 2014 Budget were introduced in legislation released earlier this year.
Current rules
Under the current rules, there are three categories of gifts that can be made upon an individual's death:
(a) Gift by Will – this occurs where an individual directs his or her estate trustees to make a specific charitable gift, with only limited discretion provided to the estate trustees in respect of the gift;
(b) Gift by Estate – this occurs where a gift is made at the discretion of the estate trustees; and
(c) Gift by Direct Designation – this occurs where an individual designates a qualified donee as the beneficiary of proceeds upon death under an RRSP, RRIF, TFSA or life insurance policy.
The Income Tax Act (Canada) currently provides that where a gift is considered a gift by Will or a gift by direct designation, the donation is deemed to have been made by the individual immediately before the individual's death. The tax credits arising from the gift are applied to the deceased's final tax return, with any excess credit available to be carried back and used against the previous year's income. Tax credits arising from a gift by Will cannot be used against income earned by the estate.
Conversely, where a donation constitutes a gift from the deceased's estate, the resulting tax credits may only be applied to the tax that would otherwise be payable by the estate. Such tax credits may not be used on the deceased's final tax return or against income in any prior years.
Proposed Amendments
The draft legislation proposes that, effective for gifts in respect of a death occurring on or after January 1, 2016, a gift by Will or by direct designation will no longer be deemed to have been made by the deceased immediately before death. Instead, the gift will be deemed to have been made by the estate at the time the property is transferred to the recipient charity.
Provided that the gift is made within 36 months of death, the new rules would then provide flexibility by affording estate trustees the discretion to allocate the tax credits resulting from a gift by Will or direct designation against any of the following:
(a) the taxation year of the estate in the year the gift was made;
(b) any earlier taxation year of the estate; or
(c) the last two taxation years of the individual prior to death.
There are several implications that appear to flow from these changes. The new rules will provide for increased flexibility in the allocation of tax credits and increased claim room. Estate trustees will be able to assess where the tax credits may be applied most beneficially (i.e. to reduce taxes owed against the taxpayer's last two T1 returns or in the estate) and thereby optimize the allocation of such tax credits against the relevant income. This may result in increased tax savings for donors on death and for their estates.
The new rules will also affect the valuation of bequests. Unlike under the current rules, in which the gifted property is valued as of the time of death, the new rules will shift the valuation date to the date the property is actually received by the charity. While this may simplify the valuation process for the recipient charity, it may make it impossible for some gifts to be claimed on the initial filing of the deceased terminal return where the property has not yet been transferred as of the filing date (with its value therefore unknown). This may lead to the increased filing of adjustments after the gift is made rather than claiming credits in the initial filing.
We will keep our readers apprised as this draft legislation progresses.
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