Draft legislation proposals were released by the Department of Finance on August 29, 2014 (the "Legislative Proposals"). These generally implement the measures introduced in the Federal Budget 2014. These measures change the manner in which testamentary charitable gifts will be dealt with under the Income Tax Act RSC 1985, c.1 (5th Supp.).
Current regime
Currently, s. 118.1(5) of the Income Tax Act provides that a charitable gift made by will (often referred to as a "Gift by Will") is deemed to have been made by the donor immediately prior to death. This is advantageous because it ensures that the charitable tax credits arising from the gift may be used in the deceased's terminal return to offset tax liability arising from the deemed disposition of his or her capital assets immediately prior to death. To the extent that these charitable tax credits are not exhausted in the donor's terminal return, a one-year carry-back of the credits to the year preceding the year of death is permitted.
The Canada Revenue Agency has issued many publications outlining its position as to what constitutes a Gift by Will, and in general, requires that: (i) the terms of the will provide for a donation of a specific property, a specific amount or a specific percentage of the residue of the estate; (ii) it is clear from the terms of the will that the executors are required to make the donation; (iii) the estate is in a position to make the donation after the payment of debts; and (iv) the donation is actually made.
Currently, the value of a Gift by Will for charitable receipting purposes is determined on the date of the individual's death regardless of when the charity actually receives property from the estate.
If a gift does not qualify as a Gift by Will, it may qualify as a charitable gift made by an estate or testamentary trust. In other cases, a distribution made to a charity from a testamentary trust will not be considered a charitable gift eligible for charitable tax credits but instead will be considered a distribution made in satisfaction of the charity's interest in the testamentary trust.
Changes Introduced
The legislative proposals introduce changes to this testamentary charitable gift regime for the 2016 and subsequent taxation years. Testamentary charitable gifts will be deemed to have been made by the individual's estate at the time the donated property is transferred to the charity by the estate. The estate will have the ability to allocate the charitable tax credits arising from the testamentary charitable gift among: (i) the estate's taxation year in which the donation was made; (ii) an earlier taxation year of the estate; or (iii) the last two taxation years of the individual. To qualify, the gifted property must be transferred to the charity within 36 months of the individual's death and must have been received by the estate on and as a consequence of the individual's death or have been substituted for such property.
Some implications
The new regime introduced by the legislative proposals appears to provide more flexibility for testamentary charitable gift planning.
It will allow executors to claim charitable tax credits for testamentary charitable gifts for five different tax periods (the year prior to death, the year of death, and three years of the estate) as opposed to just two tax periods (the year prior to death and the year of death). It will also create more flexibility by apparently eliminating the need for testamentary donations to qualify as Gift by Wills so long as the donation of estate property to the charity takes place within three years of death.
The new regime also provides certainty as to when to value testamentary charitable gifts for charitable receipting purposes - namely, upon the date of receipt by the charity within the three year period following the individual's death. This should eliminate the current divergence of position taken by charities as to whether the value of the charitable receipt is the value of the donated property on the date of death or the value of the donated property at the time the charity receives it.
Although this flexibility and clarity is in large part welcome, it will provide extra pressures on executors of estates. Executors will need to ensure that estate property is transferred to charities within three years of death in order to qualify for charitable tax credits. If the estate is involved in litigation, or if other complexities are involved, this three-year period may be difficult to meet. Moreover, even in ordinary circumstances, if the value of estate property increases or decreases following death, then depending upon the tax outcomes, executors could be criticized for either moving too quickly or waiting too long to transfer estate property to charities within the three year period.
The new regime does not appear to specifically deal with the treatment of gifts to a charity on the death of an intervening life interest (commonly referred to as charitable remainder trusts), which can qualify as a Gift by Will under the current regime so long as the trustees have no right to encroach on the capital in favour of the life tenant. The legislative proposals contemplate that the property that is the subject of a testamentary charitable gift must be transferred to a qualified donee within three years of death. While a residual interest in a charitable remainder trust is a property interest that can be transferred to a qualified donee within three years of death, it is only that property interest and not the actual underlying property of the charitable remainder trust that can be transferred prior to the death of the life tenant. As a result, there remain some questions as to manner in which testamentary charitable remainder trusts will be dealt with under the legislative proposals.
Originally published by The CBA National Charities and Not-for-Profit Law Section Newsletter.
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.
