On December 17, 2014, Bill C-43 received Royal Assent, ushering in a new era of estate planning with proposed changes to the Income Tax Act (the “Tax Act”). Included in the bill are changes which will have a significant effect on post mortem planning relating to charitable donations made on death. The new rules will apply as of January 1, 2016.
Currently, gifts to qualified donees made “by Will” are deemed to be made immediately before death. The tax credit can be used in the year of death, thereby reducing taxes triggered on the deemed disposition on death, or carried back to the immediately preceding year. This regime met with criticism in that unused credits cannot be carried forward and used by the deceased’s estate, and the requirement that the gift be made “by Will” created some confusion and uncertainty in drafting donation provisions so as to ensure the credit would be available to the appropriate taxpayer at the desired time.
The new rules significantly change the way in which donations on death will be treated for tax purposes. Gifts made “by Will”, designated gifts, and gifts made by an estate will all be deemed to be made by the estate at the time the property is actually transferred to the charity. The value of the gift will be the value at the time of the donation. The estate can carry-forward the unused tax credit for 5 years from the date of death.
Special rules will apply to gifts made by estates that qualify as graduated rate estates (“GREs”) at the time of the donation. In such cases, the credit can be claimed:
- by the deceased individual in the year of death or the immediately preceding year,
- by the GRE in the year of the donation or any prior year of the GRE, or
- in any of the next 5 tax years of the estate, provided that it remains in existence.
An estate will qualify as a GRE if:
- no more than 36 months have passed since the date of death,
- the estate is a testamentary trust under the Tax Act,
- the estate designates itself as a GRE in its first tax return that ends after 2015,
- no other estate designates itself as a GRE of the individual, and
- the deceased individual’s SIN is provided.
These rules provide enhanced flexibility to maximize the tax credits available to GREs. The exemption from capital gains for publicly traded securities will continue to apply to gifts made by GREs, resulting in no deemed disposition immediately before death for such securities provided they are subsequently donated to a qualified donee by the individual’s GRE.
Although the new rules will alleviate the issue of unused tax credits in certain situations, many existing plans may no longer be tax efficient. For example, gifts made by an alter ego, spousal trust or joint spousal or common-law partner (after the death of the settlor or spouse) can no longer be used to shelter the gain formerly triggered in the trust on the death. This is because Bill C-43 also introduces two important changes: first, a tax year end will occur in the trust at the end of the date of death of the settlor or spouse, and second, the tax triggered on the deemed disposition of the trust’s assets will be borne by the estate of the deceased settlor or spouse (subject to the tax authorities assessing the trust under a joint liability provision). When combined with the fact that the charitable donation will be made by the trust at a later date, it will not be possible to carry back the charitable tax credit to shelter the tax liability triggered on the death.
These new rules represent a significant change for donors, charities and their advisors. Everyone should be encouraged to review their donation planning before 2016 to ensure that it is still appropriate and will achieve the intended objectives. For those with irrevocable donation arrangements that are already in place or for individuals who are mentally incapable and unable to amend their existing testamentary donation planning, it may be difficult or impossible to deal with the negative impact of the new rules. Hopefully Finance will address these practical concerns in an amendment before the January 1, 2016 implementation date.