In a recent technical interpretation issued on January 27, 2015, CRA commented on the ability of a surviving spouse or common law partner to share donation credits arising from gifts made by the estate of the deceased spouse. CRA commented on this issue both in the context of the current rules that apply to estate gifts as well as the new rules that will apply beginning in 2016. These rules are described in a previous edition of this Newsletter.
CRA confirmed its existing administrative practice of allowing donation credits to be shared between spouses and common law partners. Under the current rules that apply to gifts made on death, gifts by Will are deemed to have been made by the deceased individual immediately before death. The resulting tax credits can be claimed in the donor’s last living return or the preceding year to the extent that excess credits remain. CRA’s administrative position permits these credits to be claimed by the surviving spouse. This assumes that a spousal or common-law relationship existed at the time of death and the donation would otherwise qualify as a gift for the purposes of the charitable donations tax credit.
Under the changes to the Income Tax Act that were introduced in the 2014 Federal Budget, the Act now codifies the rules regarding the ability of spouses to share donation tax credits. The new rules confirm that, in general, an individual may claim credits in respect of gifts made by his or her spouse or common law partner during their lifetime. This is consistent with CRA’s current administrative practice. However, with respect to gifts on death after 2015, the new rules are more restrictive. Under the new rules, gifts made by an individual’s graduated rate estate – i.e., within three years of death – can be allocated to the individual’s last two living years or to the estate in the year of the gift or a preceding year. The CRA technical interpretation issued on January 27 states that the new changes to the Act do not allow the surviving spouse to claim gifts made by the deceased spouse’s graduated rate estate. As such, CRA states that its current administrative practice with respect to gifts by Will no longer applies starting in 2016.
It thus appears that, under the new rules, surviving spouses will no longer be able to claim credits in respect of gifts made by the estate of their spouse or common law partner. This new reality will need be considered in the course of estate planning going forward.