The federal government recently announced amendments to the Income Tax Act (Canada) that will provide greater flexibility with respect to charitable gifts that are made in a will.
Currently, any charitable gifts that are made in an individual's will are deemed to have been made by the individual immediately before he/she died. The donation tax credits that arise from the charitable gift can be used in the deceased's final tax return or the immediately prior tax return, which can help offset the tax liability resulting from the deemed disposition that is triggered on death. However, there are a number of challenges with the current scheme. For one, it is not possible for any excess credits to be used by the estate to offset any income that may be earned by the estate after the individual's death. In addition, it is not always clear when a charitable gift is considered to be made by will. For example, if the executor of the estate has the discretion to choose the total amount to be donated to a charity, then the gift may be considered to have been made by the estate, rather than the deceased, which would prevent the deceased from using the donation tax credit.
The recent amendments, which will apply to deaths that occur on or after January 1, 2016, address these issues and provide additional flexibility with respect to how donation tax credits can be used. Regardless of whether the gift is made by the individual in his/her will or by the estate, the new rules will deem the gift to be made by the estate at the time the property is actually transferred to the charity. As long as the charitable gift is transferred to the charity within 36 months of the individual's death, the donation tax credit will generally be available to:
- the estate in the taxation year in which the gift is made;
- the estate in an earlier taxation year;
- the estate in the five subsequent taxation years;
- the deceased in the year of death; or
- the deceased in the year prior to the year of death.
To ensure that your estate will benefit from this increased flexibility, any donation planning that is already in place should be reviewed and updated as required.
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.