Charities and advisors in the area of gift planning must ensure
that they fully understand the rules surrounding donations to
registered charities from spousal trusts. These rules have changed
recently as a result of new legislation related to the taxation of
estates and donations on death.
The tax rules affecting charitable giving by estates were
modified substantially by changes introduced in the 2014 federal
budget. These changes provided that, for deaths occurring after
2015, estates will generally only have access to graduated marginal
rates of tax for the first 36 months after death, during which time
the estate is known as a "graduated rate estate" or
"GRE". After 36 months, the estate will be taxed at the
highest marginal rate of tax.
Along with the introduction of the concept of GRE were several
changes to the treatment of charitable donations on death. The
prior rules had required a complicated analysis of whether a gift
provided for in a taxpayer's Will constituted a "gift by
Will" or a "gift by the estate".
The result of this analysis determined whether the resulting
donation tax credits would be available against the deceased's
final two tax returns or against income in the estate. The new
rules provide that so long as the estate transfers the gifted
property to charity while the estate is still a GRE (i.e., within
the first 36 months after death), the estate trustees have
flexibility to allocate the resulting tax credits against any of
the deceased's final two tax returns and against income earned
by the estate in the year of the gift or any prior estate year.
Further changes introduced in 2016 provide that where a
charitable gift is made within 24 months of the estate ceasing to
be a GRE (i.e., within 5 years of death), the estate will have the
ability to allocate the donation tax credits against income on the
deceased's final two tax returns or against estate income in
the year of the gift.
The new rules affect charitable giving by spousal trusts. Under
the Income Tax Act, an individual can, by Will, transfer capital
property on a taxdeferred basis to a trust that is established to
support the individual's spouse or commonlaw partner for the
remainder of the surviving spouse's life.
Upon the death of the surviving spouse, there is a deemed
disposition of all capital property, triggering tax on any accrued
capital gains. Under the rules that applied prior to 2016, this tax
would be paid by the trust. The new rules, however, provided that
the tax incurred on this deemed disposition would be taxed in the
estate of surviving spouse rather than in the trust.
This treatment of capital gains created a mismatch where the
property in the spousal trust was designated to be gifted to
charity on the death of the surviving spouse.
The consequence of such a gift is that the trust is considered
to have made the gift and to be entitled to the tax credits, but
the income resulting from the deemed disposition of the trust
assets would be incurred in the estate. This effectively stranded
the donation tax credits.
New legislation introduced in January of 2016 has addressed this
issue. It provides generally that the tax incurred on the death of
a surviving spouse will be taxed in the trust unless the trust and
surviving spouse's estate jointly elect otherwise. It also
provides that where a spousal trust makes a gift to a registered
charity after the death of the life interest beneficiary (i.e., the
surviving spouse), the resulting tax credits will be allocated to
the trust's taxation year in which the death occurs. This
allows the charitable donation tax credits to be used to shelter
capital gains incurred on the deemed disposition of the property in
the spousal trust.
These changes have been welcomed by estate planners and gift
planners, as they remove the mismatch in the taxation of estate
gifts and allow for the effective use of donation tax credits, as
well as to provide more flexibility in the allocation of capital
gains on death of a surviving spouse. It is clear that care must be
taken in estate planning involving the use of spousal trusts and
any related charitable giving so as to ensure the most tax
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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