Canada: Testamentary Charitable Giving And The Graduated Rate Estate: A Refresher

Forms of testamentary charitable giving

Charitable gifts made by testators through their wills can take many forms: outright legacies or bequests; a gift of all or part of the residue of the estate; a contingent gift to be made in the event that a beneficiary predeceases the testator; a gift that is subject to an intervening life interest, a gift of a discretionary beneficial interest in a testamentary trust; and other gifts arising on death of donors.

In addition, a donor can designate a registered charity as the beneficiary of the proceeds of a life insurance policy, or a registered plan such as a RRSP, RRIF or TFSA.

The graduated rate estate

On December 16, 2014, amendments to the Income Tax Act came into effect which changed significantly the manner in which testamentary charitable gifts are dealt with under the Income Tax Act (Canada).

An important concept that Parliament introduced is the graduated rate estate or "GRE" (as it is now affectionately named). A GRE is defined as an estate that arose on and as a consequence of the death of an individual if:

• the estate is at that time a testamentary trust as that term is defined in the Act;
• the estate designates itself as a GRE in its tax return for the first taxation year ending after 2015;
• no other estate has designated itself as a GRE of the deceased individual; and
• the deceased's social insurance number is provided.

In addition, the new rules provide that a GRE can only last as such for up to thirty-six (36) months after the date of death of the individual. At the end of the 36-month period, the estate realizes a taxation year end and the GRE status is lost. It is important therefore that if there is planning that relies on GRE status, it must occur within this time period.

What are the benefits of being a GRE?

There are many benefits that are available for a GRE and not for other testamentary trusts. This paper will focus on the benefits available for charitable gifts.

In respect of charitable gifts, the current regime provides flexible rules for donations by will or estate, the availability of zero capital gains to the estate in respect of donations of public securities, ecological property and cultural property from a GRE, and the ability to make gifts of private company shares on death.

The legislation introduced significant changes to this testamentary charitable gift regime both as to the timing and recognition of charitable gifts for tax purposes.

Donations made by will and designated donations (RRSP, RRIF, TFSA and life insurance) are deemed to be made by the estate at the time when the property is transferred to a charity.

As well, the fair market value of the gift for tax receipting purposes is to be determined at the time of the transfer of property rather than the fair market value at the date of death.

The legislation builds flexibility into the ability to use the charitable tax credits in respect of estate gifts by will and designated donations if made by a GRE.

If a charitable gift is made by a GRE or within years (2) years after a GRE ceases to be a GRE (so long as it otherwise qualifies as a GRE, but for the expiration of the thirty-sixth (36th) month period) then the estate can allocate the charitable tax credits among:

• the terminal or last taxation year of the donor;
• the taxation year preceding the taxation year of death; and
• the taxation year of the estate in which the donation is made and any prior GRE years of the estate.

In addition, the zero capital gains inclusion rate on death for gifts of publicly-traded securities, ecological gifts and gifts of cultural property will also be available if made by a GRE or within 24 months after ceasing to be a GRE.

The annual charitable donation limits of 100% of net income for the donor's last taxation year or for the taxation year preceding the taxation year of death will continue to apply.

An additional requirement is that the property to be transferred to the charity by the GRE or extended GRE must be property held by the deceased at date of death or property that is substituted for it. This rule is important to keep in mind when contemplating post mortem reorganizations in circumstances where charitable gifting is also involved as the property to be gifted after such a reorganization may not be property owned by the deceased at the date of death or property substituted for it. For example, dividends declared on shares owned by the deceased with the intention that they be used to fund a charitable gift would not qualify. In addition, it is important to note that a borrowing of funds by an estate to effect a charitable gift within the sixty (60) months will also not qualify.

An estate other than one that qualifies as a GRE or an extended GRE will continue to be able to claim charitable tax credits in respect of other donations in the year in which the donations are made or in any of the five (5) following years.

Timing considerations and pressures

Although this flexibility and clarity is in large part welcome, it may create extra pressure for executors of estates. Executors will need to ensure that estate property is transferred to charities within sixty (60) months after death in order to qualify for the ability to allocate charitable tax credits in the year of death or the year prior to death. Unlike for some other time periods in the Income Tax Act, there is no provision for ministerial discretion to extend this time period. This sixty (60) month period may be difficult to meet if the estate is involved in litigation (family law claims, dependent relief or wills variation claims, will challenges, etc.) or the estate's assets are illiquid (real estate, private company shares). 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 property to charities within the sixty (60) month period.

Added to these issues, extra pressures arise as executors may be subject to personal liability if they distribute assets to charity without first obtaining clearance certificates from CRA which can take a long time to obtain in certain cases.

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.