Charitable Donations by Will: Income or Capital?

Evelyn Jacks

Last week at the CE Summits in Vancouver, an interesting question arose with regards to the deductibility of gifts left by a deceased taxpayer to a specific charity in his will. Would that specific bequest qualify for the donations tax credit on the final return, a trust return or both? It turns out, the answer may be neither. 

In addressing this, Knowledge Bureau faculty member Henry Shew, CPA, CA, referred to a 2019 STEP CRA Roundtable discussion where the CRA was asked questions related to this issue using a hypothetical scenario in which a residual beneficiary of an alter ego trust is a registered charity. Will this distribution be a donation eligible for the donations tax credit, or will it be considered a payment out of income or capital?

According to the CRA’s response,  in circumstances where the trustee has no discretion as to whether the payment will be made to the specific charity (because the will specifies that a particular charity is to receive the gift) the payment would not qualify as a gift and would therefore not qualify for the donation tax credit either. But, should the trustee be given discretion as to which charity would receive a gift, or whether the funds would be used in another manner, the payment made would be considered voluntary and therefore eligible for the charitable donations tax credit. Whether a payment is considered a gift or not, in other words, is a question of fact and something tax practitioners need to think about in doing estate planning with their clients. 

In discussing the rules with numerous practitioners in his circle, Henry found little consensus on the matter, so Knowledge Bureau Report turned to both the CRA website and its new MFA-P™, Philanthropy Designation program, developed in collaboration with CAGP and Spire Philanthropy for further answers. 

Here’s an excerpt from one of the three courses in that designation program that addresses this complex issue:

“Pursuant to Income Tax Act 118.1(5.1), for donations made via the deceased’s will after 2015, the donation will no longer be deemed to have been made by the individual immediately prior to their death.  Instead, it will be deemed to have been made by the estate at the time the donation is transferred to the charity.

If the estate is a GRE, the estate’s legal representative may allocate the donation to:

  • The estate for the year in which the donation ,
  • An earlier taxation year of the estate, or
  • The last two taxation years of the deceased.

Note that gifts via the will made within 60 months of the date of death may also be claimed in any year of the GRE OR former GRE to a maximum of 75% of net income, as well as on the non-GRE estate return for up to 5 years after death to a maximum of 75% of net income.  A “former GRE” estate is the 24 months immediately following the termination of the GRE.  Therefore, when claiming DTC, the “GRE” timeline is effectively extended to 60 months.

Why is the GRE so important in planning a gift via the Will?  Gifts via the GRE are the only way for the deceased to claim the DTC to offset the deemed dispositions at death.  Furthermore, the deceased AND the GRE are eligible for the zero capital gains inclusion for gifts of publicly listed securities.

When it comes to specific gifts, the course reminds its’ students that due to the deemed disposition rules, the proceeds from an RRSP and or RRIF are 100% taxable income to the deceased in the year of death, unless the deceased has a surviving spouse or disabled dependent. An effective way to eliminate the taxes owing from RRSP and or RRIF at death is to make charitable donations, and one of the more popular methods is to make a charity the beneficiary of the RRSP and or RRIF. 

It goes on to note that the Income Tax Act 118.1 (5.2) details the conditions that permit the eligible transfer of proceeds to a charity from a life insurance contract (e.g. life policy or annuity), or registered plan to be considered a charitable gift from a GRE.  Such eligible transfers to a charity must occur as a result of the death of the insured or annuitant of a non-charity owned life insurance policy or annuity, and/or a registered plan – namely a RRSP, RRIF, or TFSA.  Once the cash proceeds are received, the DTC can be claimed as per the GRE rules stated earlier.” 

Also referenced in the course is the question on whether trusts can be used in testamentary gifting.  “A primary issue is that the trust was not property of the deceased, hence cannot form part of the testamentary trust, and thus is not included in the GRE.  Therefore, in this module, we will focus on inter vivos uses of trust in charitable giving.

As with all types of charitable gifts, in order to qualify as a gift there must be a transfer of property.  What is not commonly known outside of the advisory world is that an interest in a property is considered property.  And an interest in a property may be created by a trust.  For example, Income Tax Act 108(1) defines an income interest as a right for a beneficiary under the trust to receive all or part of the income from the trust.  Similarly, 108(1) defines the capital interest as all rights as a beneficiary of a trust with the exception of the income interest.  It is the capital interest that is most often used in charitable gifting, and the vehicle of choice for making such a gift is the charitable remainder trust.

Unlike spousal, personal, master, qualified disability, and alter ego trusts to name a few, a charitable remainder trust (CRT) is not defined in the Income Tax Act.  It is a marketing term widely used within the Canadian charitable sector to refer to a trust that is established with the capital or “remainder” interest to be transferred to a charity when the trust is collapsed. 

Provided that the capital of the trust cannot be encroached upon by anyone AND can be valued in a reasonable manner, CRA is willing to allow a tax receipt to be issued for the value of the capital interest to be received later less any advantage received.  Interpretation Bulletin IT-226R is referenced as the authority in setting forth the conditions under which a charity can issue a donation receipt

Executors and their professional practitioners must be prepared to gather all receipts and help clients obtain fair market valuations (in the case of capital property bequests). The subject is clearly complicated, and requires the help of a specialist in the area of strategic philanthropy.

Additional Educational Resources.  Consider taking the new MFA-P™, Philanthropy Designation program to shore up your knowledge on some of the more sophisticated questions you may need to discuss your clients and their tax, legal and financial advisors.  The course goes into significant details with numerous excellent examples of various scenarios that outline planning options.  It is an excellent investment for any practitioner who is working extensively with clients interested in developing a charitable giving strategy as part of their estate plans.

Get Your Copy of CE Summit Knowledge Journal.  Did you miss the Winter CE Summits?  It was an excellent tour in which hundreds of tax and financial professionals came up to speed on the numerous changes for 2020 tax season and walked away with their 330-page plus comprehensive desk reference, the Knowledge Bureau Advanced Tax Update Journal, a three month subscription to EverGreen Explanatory Notes, plus a $200 credit that expires this week, to be used on any Knowledge Bureau educational program. It was a great value for all concerned!

Good news!  You can still purchase the CE Summit January Advanced Tax Update Journals for your team.  Only $395 until the end of the month. Remember, it’s a great time to train your team before tax season officially begins on February 24.  Call 1.866.953.4769 to get your copy. Be sure to attend the Spring CE Summits as well.

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CRT are defined in the Internal Revenue Code of the USA and are very common form of charitable gifting.