On January 15, 2016, the Department of Finance released draft legislation that proposes to amend the rules in the Income Tax Act (ITA) that deal with whether donations of property by estates are exempt from capital gains tax as well as how estates are permitted to use charitable donation tax credits (CDTCs).
The legislative proposals specifically deal with donations made by estates that are no longer graduated rate estates (GREs). Generally speaking, a GRE is an estate that has been specifically designated as a GRE and that meets certain other technical requirements. The estate will remain a GRE for the 36-month period following the death of the particular individual, during which time certain tax benefits are conferred on the GRE.
As indicated above, the new legislative amendments propose to make it more flexible for estates that are no longer GREs to obtain certain tax benefits. More specifically, Finance is proposing that those benefits be available beyond the 36-month period and up to 60 months after the taxpayer’s death.
The new legislative proposals are explained in more detail below.
Gifts of Public Securities, Ecological Land, and Cultural Property
The ITA currently provides that a taxpayer’s taxable capital gain from the disposition of any of these types of property is equal to zero if the disposition is deemed by the ITA to have occurred immediately before the taxpayer’s death and the property is the subject of a gift made by the taxpayer’s GRE to a qualified donee. This change was only recently enacted and is applicable to 2016 and subsequent taxation years.
The new amendments will modify the language in the ITA that provides that the capital gains exemption will be available where the gift is “made by the taxpayer’s GRE” with a reference to “the taxpayer’s estate.” Finance has indicated that the result of this will be that the capital gains exemption will be available for gifts made up to 60 months after the taxpayer’s death.
Finance has proposed that once enacted, this change will apply to the 2016 and subsequent taxation years.
Use of Charitable Donation Tax Credits
Under the rules currently in place and that apply to the 2016 and later taxation years, a GRE is permitted to allocate CDTCs in any of the following taxation years:
- the taxation year of the estate in which the donation was made;
- an earlier taxation year of the estate; or
- the last two taxation years of the individual before the individual’s death.
Finance’s proposed amendments extend the time in which GREs may take advantage of their ability to allocate CDTCs. While the existing legislation only allows for the allocation to be made within the 36-month period following an individual’s death and during which time the estate is a GRE, the proposed changes would extend this period to 60 months.
Finance indicated in the background document that it released with the legislative proposals that any CDTCs arising from donations made after the estate ceased to be a GRE could only be allocated among either:
- the taxation year in which the donation was made; or
- the last two taxation years of the individual.
Finance has proposed that these amendments apply to the 2016 and subsequent taxation years.
If implemented in the form proposed, these amendments will be a welcome relief to many individuals and organizations since they provide more flexibility to choose the year in which gifts of property can be made by estates in order to eliminate liability for capital gains tax, as well as more flexibility for estates to use CDTCs.
Notably, Budget 2015 and subsequent legislative amendments proposed to change the rules in the ITA around private company shares deals. As the legislation was originally released, such gifts would be subject to the same 36-month cut-off. Finance’s January 15, 2016 proposals do not address this issue. Thus, it remains unclear how gifts of private company shares will be dealt with in light of these new amendments.
Finance has asked for comments on the draft legislation to be submitted before February 15, 2016. For more information, click here.