September 22, 2016
Income Tax Update – Charitable Giving
Canada is one of the most charitable countries in the world. Even better, our government supports us in our charitable giving. The government allows for significant tax credits – especially if the charitable gift is made in a Will.
Tax treatment of donations
In order for a donation to qualify for the donation tax credit (DTC):
the donation must be made to a qualified donee (which includes registered charities)
the donation must be a voluntary transfer of property
the donor must have the intention to make the gift, and
the donor cannot receive any benefit or consideration for the gift.
During a person’s lifetime, the DTC claimed is limited to donations made up to 75% of the individual’s income for the year. Gifts made in excess of the 75% limitation can be carried forward for up to five years.
For donations made during the year the individual passes away (including donations made in a Will), the limitation noted above increases from 75% to 100% of the individual’s income for the year. Any unused donations can be carried back to the prior year and the donation limit increases from 75% to 100% for that year.
Tax treatment of donations made in a Will prior to 2016
Before 2016, donations made in a Will were considered to be made by the deceased individual during the year that individual passed away. The DTC provided was based on the value of the donated property at the time of the individual’s death. In addition, donations that could not be utilized in the deceased’s final return or in the preceding year return were lost.
Tax treatment of donations made in a Will after 2015
The new rules have made it easier to claim the DTC if the donation is made by a Graduated Rate Estate (GRE). If a donation is made as a consequence of death, either by an individual’s Will, by the estate or by a designation of the deceased’s RRSP, RRIF, TFSA or life insurance policy and the individual’s estate is a GRE, there is significant flexibility with respect to claiming the donation and the use of the DTC.
If the donation was made by the GRE within 36 months of the death, the donation can be claimed on:
the deceased’s return preceding the terminal return;
the deceased’s terminal return;
the GRE’s return in the year donation was made; OR
the GRE’s return for a preceding year
If the donation was made after 36 months, but within 60 months of death and is made by an estate that meets all requirements of a GRE other than the 36-month deadline, the donation can be claimed on the returning preceding the terminal return, on the terminal return or in the year the donation is made.
Any unused donations can be carried forward by the estate for five years.
The executor can review the tax returns for each taxation year of the deceased and the estate. Then they can determine the “best” use of the donation credit.
The value of the property on which the donation credit is calculated is now equal to the value of the property at the time the donation is made – as opposed to the value of the property at the time of the individual’s death.
With all this flexibility there are some issues such as:
This flexibility is only available if the estate is a GRE.
The prepayment of taxes on the terminal return.
If the taxes on the terminal return are due before the donation is made (i.e. the donation credit cannot be claimed) this may create a significant cash flow limitation for the estate.
Changes in the value of the property donated.
If the value has of the donated item increased between the time the individual passed away and the time the donation is made, the increase in value will be subject to tax and the estate will be liable for the tax on this increased value. However, the DTC that will arise will also increase.
If the value of the donated item has decreased between the time the individual passed away and the time the donation is made, the capital loss that will arise upon the donation can only be utilized to offset the capital gain that arose in the terminal return if the estate is a GRE and the donation is made within the first taxation year of the estate.
Changes welcomed
Overall, the estate planning community has welcomed these changes. However, to ensure that your charitable gift is made in a tax-beneficial manner, you should make sure your Will considers these new rules. We recommend you review your estate plan and Will – and seek professional advice to ensure that your charitable gifting is tax-efficient.
We Are Here To Help
For more information regarding this topic, please contact the Manning Elliott Tax team.
The above content is believed to be accurate as of the date of posting. Tax laws are complex and are subject to frequent changes. Professional advice should be sought before implementing any tax planning. Manning Elliott LLP cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.