Recent updates to Canada's Income Tax Act provide
greater flexibility for executors to allocate deductions for
charitable gifts between the deceased herself and her estate. These
new rules provide a valuable tool from an estate planning
perspective. In addition, they also clear up certain areas of
confusion under the old legislation. These updates come into effect
in 2016 and are discussed below.
Under the old rules, which will remain in effect for 2015, there
was a distinction as to whether the deceased had made a gift by
will or whether it was by the estate. One example would be where
the will gave discretion to the executors as to the quantum of the
donation. Another would be where the will provided discretion to
executors as to which charity (or other qualified donee) received
the donation. The question in these circumstances was whether the
gift was truly made by will, and thus by the deceased, or by the
Timing was also an issue. In these circumstances, is the gift
made on the death of the individual or at the time the property
itself was transferred?
The new rules resolve these issues definitively.
The focus of the new legislation is the time at which the
property is transferred. If the gift is made by will, by the estate
or by a qualifying beneficiary designation under a RRSP, RRIF, TFSA
or life insurance policy, then the donation is deemed to have been
at the time the property is transferred and not at any other
by the estate and not the deceased or any other
Previous concerns about gifts being subject to a formula or
discretion to the trustees as to the objects of the donation are
thus no longer relevant.
Consider a will which provides discretion to the executor of the
estate as to the quantum of a donation and the charity which is to
be the object of the donation. Pursuant to this power, the executor
chooses to donate $10,000 to The Canadian Red Cross Society, a
registered charity, during the first year of the estate. The result
under the new rules is that this donation is deemed to be made (1)
by the estate and (2) during its first taxation year.
The result is precisely the same if the $10,000 donation is
expressly made by will and the property is transferred during the
first year of the estate. In other words, the result is that this
donation too is deemed to be made (1) by the estate and (2) during
its first taxation year.
The flexibility in allocation discussed earlier revolves around
whether the estate is a "graduated rate estate"
("GRE") under the Income Tax Act. Most estates
will be GREs for the first three years of their existence, but can
be excluded from this definition if they cease to be a
"testamentary trust" under the Income Tax Act,
perhaps because of a contribution to the capital of the trust
otherwise than as a consequence of the death of the deceased.
Though a full discussion of GRE requirements and pitfalls is
outside the scope of this update, access to graduated rates for the
first three years of an estate's existence also depends on the
estate being a GRE, so care should be taken to obtain tax advice
before providing any funding to an estate or otherwise taking an
action that might jeopardize its status as a GRE.
If an estate is a GRE, the executor has the flexibility to
allocate the gift deemed made by the estate to any of the following
to the deceased in her year of death;
to the deceased in the year before her year of death;
to the GRE in its first year;
to the GRE in its second year; and
to the GRE in its third year.
In addition, the typical 5 year carry-forward for all gifts
remains in effect.
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.
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