Several important changes in the tax rules that apply to charitable gifts will be coming into effect in the near future. Some of the new rules take effect in 2016, and others will apply beginning in 2017. The new rules provide increased flexibility and tax benefits for certain charitable donations, but the new rules will require existing plans for charitable donations on death to be reviewed, to ensure the plans comply with the new rules. This update provides a refresher on the current tax rules, and explains the upcoming rule changes.
Existing Rules
Individuals receive a non-refundable federal and provincial tax
credit for donations to Canadian registered charities. The combined
federal and provincial credit on donations over $200 per year is as
high as 50% of the donated amount (depending on the province the
donor resides in). A lower credit applies to the first $200 of
donations per year. The tax credit is capped at 75% of the
individual's net income for the year, or 100% of net income in
the year of death. Individuals can carry unused donation tax
credits forward for up to five years. In 2013 the government
introduced a "super credit" for first-time donors: an
additional 25% credit is received for the first $1,000 of
charitable donations made by an individual who, together with the
individual's spouse or common-law partner, has not claimed any
charitable donations since 2007.
Donations made after death, through an individual's will, are
subject to special tax rules. Under the current rules a donation
made under a will is deemed to be made by the individual prior to
death, and the donation tax credit can be applied against taxes
payable on the deceased's final tax return, or against taxes
payable in the preceding year, in each case subject to a limit of
100% of the deceased's net income in those years. The amount of
the donation will be equal to the fair market value of the gifted
property at the time of death. The new rules described below are a
significant change from these existing rules.
Donations of property that has grown in value may trigger capital
gains tax as well as a donation tax credit. The existing rules
provide a special exemption from capital gains tax on the donation
of public company shares, but donations of other types of property
(i.e. private company shares and real estate) are subject to
capital gains tax. Relief will be available for such donations
under new rules that come into effect in 2017 (discussed
below).
Corporations also benefit from donations to registered charities.
Corporations receive a deduction from income for donations, rather
than a credit against taxes payable. Unused deductions may be
carried forward for the same periods as are noted above for
individuals.
New Rules
Donations Under a Will
Beginning in 2016, donations under a deceased person's will
are no longer automatically deemed to have been made in the year
prior to death. Instead the donation is considered to be made by
the individual's estate - which is a separate taxpayer from the
deceased. The estate can carry any unused donations forward for up
to five years, but cannot carry the donation back to the tax
returns of the deceased person, unless the estate qualifies as a
"graduated rate estate" (discussed below). This rule
change is an important restriction for most estates, because
estates typically have limited taxes payable (as most of the income
tax triggered on death is payable on the deceased's final tax
return).
The new rules will allow the estate to carry the donation credit
back against the taxes payable on the deceased taxpayer's final
tax return and prior year only if the estate qualifies as a
"graduated rate estate" ("GRE"). A GRE is an
estate under an individual's will (but not any separate trusts
created under the will); GRE status only applies for the first 36
months after the individual's death, and only if the estate is
designated as a GRE on the first tax return filed by the estate. If
the estate is a GRE, the estate can choose to apply a donation tax
credit in the year of death, the year immediately preceding death,
the year in which the donation is made by the estate (and up to
five years afterward), or a prior tax year of the estate.
The rules for determining whether an estate qualifies as a GRE are
complex, and readers who plan to make charitable donations in their
wills should obtain professional advice to ensure that their estate
will qualify as a GRE. Certain common estate planning vehicles,
such as alter ego trusts and joint partner trusts, do not qualify
as GREs, and charitable donation plans involving these types of
trusts may need to be revised to fit within the new rules. Finally,
wills that may result in a long-term estate (i.e. a will that
contains a spousal trust for the lifetime of a surviving spouse of
the deceased) may lose their GRE status before any charitable
donations can be made. Wills designed to provide for both long-term
trusts and charitable donations should be revisited to see if
changes are required.
As a final note on the new rules, the amount of the charitable
donation will be based on the fair market value of the gifted
property at the time the donation is actually made by the estate,
rather than the value at the date of death (which is the relevant
date under the existing rules).
Sale of Real Estate or Private Company Shares
A donation of capital property (i.e. company shares or real estate)
to a charity results in a charitable donation credit, but also can
trigger capital gains tax if the donated assets have grown in
value. For a number of years the government has exempted donations
of public company shares from any capital gains tax, but donations
of private company shares and real estate remain subject to
potential capital gains tax. New rules that take effect in 2017
will provide capital gains relief for donors who sell private
company shares or real estate, and then donate the proceeds to
charity. If the proceeds from the sale of real estate or private
company shares are donated to a registered charity within 30 days
of the sale, no capital gains tax will apply. This new exemption
only applies if the sale is made to a buyer that deals at arm's
length with both the donor and the registered charity. If the donor
gives less than 100% of the sale proceeds to charity, the exemption
from capital gains tax will be pro-rated accordingly. Note that
under the new rules there is still no exemption from capital gains
tax when private company shares or real estate are donated directly
to a charity
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.