Individuals often include charitable bequests in their estate planning. Such bequests are typically structured as:
- Gifts by one’s Will, where the testator directs his or her estate trustees to make a specific charitable gift on his or her behalf (the “Will Gift”);
- Gift by the testator’s estate where a gift is made at the discretion of the estate trustees (the “Estate Gift”); and/or
- Gifts by direct designation where the testator designates a charity as the beneficiary of a RRSP, RRIF, TFSA or life insurance policy (the “Direct Gift”).
Currently, depending on the structure of charitable bequest chosen, there will be different tax consequences. For instance, where a Will Gift or Direct Gift is made, it is treated for tax purposes as having been made immediately before the testator’s death. This treatment results in the tax credits arising from the gift as being applicable to the deceased’s final tax return, with any excess credit available to be carried back and applied against the previous year’s tax. Tax credits resulting from Will Gifts or Direct Gifts, however, may not be used by the Estate. Consequently, a portion of these tax credits will be wasted where the deceased does not have enough tax due in his or her year of death or the prior year.
Similarly, where an Estate Gift is made, only the estate can claim the donation. As such, tax credits arising from Estate Gifts will also be wasted where the estate does not have enough tax for the credits to be applied against. This is the case since the excess tax credits may not be used on the deceased’s final tax return.
Thanks to recent draft legislation, proposed to apply to deaths after 2015, some of these issues may be solved through the provision of greater flexibility in the tax treatment of such charitable bequests. Under the draft legislation, Will Gifts and Direct Gifts will no longer be deemed to have been made by immediately before death. Rather, such gifts will be deemed to have been made by the estate at the time the donation is made. As a result, all donations arising from death, whether Will Gift, Estate Gift or Direct Gift, will be treated as being made at the discretion of the estate trustees.
Provided the donation is made within 36 months of testator’s death, however, the estate trustees may choose whether to claim the donation in the estate (including prior years) or in the individual’s last two taxation years ending at the date of death. The increased flexibility in the utilization of such charitable bequests may allow for the maximum amount of tax credit arising from these donations to be used by the deceased and the estate, thereby making Will drafting easier in this regard.
For further information on the new draft legislation, and how it also addresses the difficulty in valuing charitable bequests, please read this useful article at written by Cadesky and Associates LLP .
Thank you for reading.