In the last few years, the federal government has been proposing changes to the taxation of estates.
Last fall I reported on changes to the taxation of testamentary trusts, which will apply as of January 1, 2016. Most recently, changes to the tax treatment of charitable donations made on death have been proposed.
Bill C-43 received Royal Assent on December 16, 2014. It proposes changes to the Income Tax Act in respect of the taxation of charitable donations made on death, among other things. The new rules will apply as of January 1, 2016.
Under the current rules, a charitable donation made by an individual through his or her Will (a “gift by Will”) is deemed to be a gift made by the individual immediately prior to his or her death, and a gift made in the year of death is deemed to have been made in the year immediately prior to death. The tax credit in respect of the gift by Will can be used in the year of death or carried back to the immediately preceding year, thereby reducing taxes triggered on the deemed disposition on death. However, unused credits cannot be carried forward and used by the deceased’s estate.
The value of non-cash donations is based on the fair-market value of the property on the date of death, not the date when the charity receives the gifted property. The date of valuation sometimes causes issues where there is a change in the value of gifted property after death, and after the charity issues the donation tax receipt in respect of same.
Under the new rules, all estate gifts (regardless of whether they would otherwise be categorized as gifts by Will or gifts by the estate under the old rules) will be deemed to have been made by the estate at the time the gift is transferred to the charity. The value of the gift will be the value at the time of the donation, which should eliminate the kinds of valuation issues that exist under the current rules. In addition, the estate will be able to carry-forward the unused tax credit for 5 years from the date of death.
The concept of a “graduated rate estate” (“GRE”) was introduced in the 2014 Federal Budget. A GRE is an estate that (i) arises on and as a consequence of the death of an individual, (ii) qualifies as a testamentary trust under the Income Tax Act, and (iii) is designated as a GRE in its first tax return that ends after 2015. In addition, no other estate may designate itself as a GRE of the deceased individual, and the deceased individual’s social insurance number must be provided. Finally, the estate will only qualify as GRE for 36 months from the date of the individual’s death.
Gifts made by estates that qualify as GREs at the time a charitable donation is made may enjoy greater flexibility in claiming donation tax credits. In such circumstances, the donation tax credit can be claimed (i) by the deceased individual in the year of death or the immediately preceding year; (ii) by the GRE in the year of the donation or any prior year of the GRE; or (iii) in any of the next 5 tax years of the estate, provided that it remains in existence.
While the new rules provide flexibility in respect of unused tax credits in certain situations, and will provide greater certainty in respect of the date a gift is made to a charity, there are still many issues with the rules, including issues for charitable remainder trusts. In addition, estate trustees will need to ensure that gifts are made to charities within 3 years of death in order to qualify for charitable tax credits, which for many reasons may not be possible.
It is important to review your entire estate plan, including your plans for charitable donations in your Will before 2016, to ensure that your plan will continue to achieve its intended objectives under the new rules.
Please contact your estate planning advisor to learn how the new tax rules relating to the treatment of charitable donations made on death, as well as the other changes to the taxation of estates, could affect your estate plan.