Many individuals make donations to charities in their Wills. Not only does this fulfill philanthropic goals, but it also provides a tax benefit.  Making a charitable gift by will provides donation tax credits which can be used to offset the deemed disposition of capital property that occurs on death.

There have been many changes to the testamentary charitable gifting rules, which are effective for deaths occurring after January 1, 2016. For deaths that occurred prior to 2016, the Income Tax Act RSC 1985, c.1 (5th Supp.) (“ITA”) provided that a charitable gift made by Will was deemed to have been made by the donor immediately before death.  This ensured that the donation tax credits arising from the gift could be used in the deceased’s terminal return to offset the tax liability arising from the deemed disposition of capital property immediately prior to death.  Any excess donation tax credits that were not utilized in the deceased’s terminal return could be carried back one year to be used in the year preceding the year of death.

For deaths occurring in 2016 and subsequent tax years, charitable gifts in a Will are deemed to have been made by the estate at the time the property is actually transferred to the charity, and the value of the donation tax credit is the value of the property at the time it is transferred to the charity. The donated property must be property owned by the deceased at the time of death or property substituted therefor (the “Property”).  The ITA provides flexibility where the gift is made by an estate which qualifies as a “graduated rate estate”[1] (“GRE”).  If a GRE makes a donation of the Property, the charitable donation tax credit may be allocated among any of the following tax years:

• year of death of the donor;
• year prior to year of death of the donor;
• year of GRE that the gift is made; or
• any prior year of the GRE.

Difficulties arise where gifts are unable to be made within the first three years following an individual’s death as a result of an intervening life interest, illiquid assets (such as real estate or shares of a private corporation), or where the estate is involved in ongoing litigation. As a result, recent amendments to the ITA have provided further flexibility where the gift is made within the two year period following the GRE Period (i.e., months 37 to 60 after the death of the donor), so long as the estate continues to qualify as a GRE in all other respects during this additional time period. In this case, the charitable donation tax credit may be claimed in any of the following tax years:

• year of death of the donor;
• year prior to year of death of the donor;
•  year of estate that the gift is made; or
• any prior year that the estate was a GRE.

For example, if a gift is made in the fifth year following the donor’s death, the donation tax credit can be claimed in the year the donor died, the year preceding the year of the donor’s death, the fifth year following the donor’s death (i.e., the year the gift was actually made), or years one, two or three following the donor’s death where the estate was a GRE. The legislation seems to exclude the fourth year following the donor’s death where a gift is made in year five.

It is clear that the timing of making donations is important. The various timing rules place additional pressure on executors of estates and, as a result, executors should seek advice where there are charitable gifts in a Will.

[1]        A GRE is defined in the ITA as an estate that arose on and as a consequence of the death of an individual if the estate is at that time a testamentary trust (as defined in the ITA); the estate designates itself as a GRE in its first tax return for the year ending after 2015; no other estate has designated itself as a GRE of the deceased individual; and the deceased’s social insurance number is provided.  A GRE can only last as such for up to 36 months following the date of death of the individual (the “GRE Period”).