The generosity of Canadians is evidenced by the $8.3 billion of charitable donations made by over five million people in 2012. The reasons are many. Some individuals have a strong desire to share their wealth during their lifetime. Others are reliant on their wealth to fund their retirement, but value the opportunity to share when they die. Some individuals want to ensure that their charitable goals can be continued long after they are gone. Whatever the reason, charitable gifts and bequests are very common.
The federal government and all of the provinces offer a non-refundable tax credit for charitable gifts. Under the current rules, a gift made through a will or through naming a charitable beneficiary of an insurance policy is deemed to have been made by the deceased the moment before death. This means that such gifts are eligible for a tax credit that can be claimed on the deceased’s terminal tax return up to the amount of net income. The amount of the donation not claimed on the terminal return can be carried back and claimed on the prior year’s tax return.
Under current rules, the tax on income arising on death (due, for example, to the triggering of capital gains and the inclusion of remaining RRSP/RRIF amounts) can be offset by the credit available on charitable donations. In addition, the opportunity to carry back unusable donation credits to the year prior to death can generate a refund of income taxes paid in that year.
New legislation with respect to donations through a will or beneficiary designation will alter how the tax credit can be claimed for deaths after 2015. Donations through a will or beneficiary designation will be deemed to have been made by the deceased’s estate at the time the gift is completed, and the new rules add the option of claiming the donation on the estate return provided it is within the required timeframe. This change creates greater certainty with respect to the amount to be claimed because the value of the donation will be established at the time of the gift rather than shortly after the individual passes away. For example, assume Elena leaves one-half of her estate to ABC Charity. Under the current rules, the gift to ABC Charity can be claimed on Elena’s terminal and prior year individual income tax returns, but the exact value of the gift may not be easily established until the estate is wound-up. Under the new rules, the valuation date for the gift creates greater certainty and the option of claiming the gift on the estate return.
Provided that the gift is completed within 36 months of the date of death, the executor will have enhanced flexibil- ity as to which return to claim the charitable tax credit on. The charitable tax credit can be claimed on the terminal tax return, the deceased’s prior year tax return, the estate return or, where applicable, carried forward to a future income tax return of the estate. The executor will be able to elect how much is claimed on which tax return. This is a significant opportunity which will enhance an estate’s ability to fully utilize the tax shield of charitable gifts made through a will or beneficiary designation.
Gifts by Will and Beneficiary Designation
|Current Rules||Proposed Rules|
|Timing of gift||• Deemed to have been made at the moment before death||• Deemed to have been made when completed. Must be made within 36 months following the date of death.|
|Choice of tax returns||• Terminal return
• Return for year prior to death
|• Terminal return
• Year prior to death
• Estate’s tax return
The proposed rules enhance estate planning by making the valuation of charitable donations easier and increasing the number of returns where the charitable tax credit can be claimed.
E.O. & E.
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Contributors to this edition:
James W. Kraft, cpa, ca, mtax, tep, cfp, clu, ch.f.c.
Deborah Kraft, mtax, tep, cfp, clu, ch.f.c.