This blog was written by Pritika Deepak, Associate at Fasken. 

How often have you heard of people turning down gifts? It may happen on TV but does it happen in reality? Surprisingly, yes. Although uncommon, in an estates context, there may be situations where a beneficiary does not want their gift. There may, for example, be a situation where the gift has conditions which are too difficult to fulfil, or where the gift is more of a burden than a benefit. Alternatively, the beneficiary may have no need for it and may want the person who is ‘next in line’ to receive it, instead.

Regardless of the reason, it is important to be aware of the different ways and consequences of rejecting a gift.

Disclaimer

A disclaimer is a rejection of a gift before the gift has been accepted. The recipient or beneficiary of a gift is generally presumed to accept a gift unless they clearly reject it. A rejection by disclaimer has the effect of voiding the gift ‘ab initio’, or said more simply, treating it as though it never existed. Effectively, there is no transfer of any interest in the property from the donor to the beneficiary. The beneficiary can disclaim the gift orally, in writing or by their conduct. Regardless of the method of disclaiming the gift, the beneficiary should be mindful of the timing of such disclaimer. It should be done as soon as possible after a beneficiary becomes aware of the intended gift, so as to avoid any implications that the gift has been accepted.
In an estates context, if there is a valid disclaimer of a gift or interest in a will, the failure of the gift will date back to the date of the testator’s death. The type of gift or interest being disclaimed may effect the succession of the gift.

Renunciation

In contrast to a disclaimer, a renunciation is the rejection of a gift after it has been accepted. Although not common, renunciations can occur when the recipient of a gift no longer wants the gift or where they no longer wish to (or are able to) satisfy the conditions of the gift. On an effective renunciation, the beneficiary may surrender their interest or assign their interest to another beneficiary. It is important to note that a renunciation is akin to a disposition of property by the beneficiary for the purposes of the Income Tax Act (Canada), and as such there may be tax consequences to consider.

Take for example a situation where assets are held in trust for the spouse of a deceased testator. The surviving spouse is the sole income beneficiary of the trust and on the death of the surviving spouse, the children of the testator are entitled to the remaining capital of the trust. After receiving income from the trust for several months, the surviving spouse decides to renounce their interest in the trust. In this case, there would be a disposition of their income interest which may trigger tax consequences. As the surviving spouse received income from the trust, they cannot ‘disclaim’ their interest. If, however, the surviving spouse rejected their interest in the trust before receiving any income, it would likely qualify as a disclaimer instead of a renunciation.

Although the terms disclaimer and renunciation are often used interchangeably, it is important to understand and appreciate their subtle differences as each may have varying legal and tax implications for the beneficiary.