Estate Donations - Deaths after 2015
Notice to the reader
Although the new rules received Royal Assent, the Department of Finance proposed certain changes to these rules on January 15, 2016. Refer to the new Q&As related to these changes for more information.
For deaths that occur after 2015, new rules will apply for charitable donations made by will and for donations of a direct distribution of proceeds from a Registered Retirement Savings Plan (RRSP), a Registered Retirement Income Fund (RRIF), a Tax-Free Savings Account (TFSA) or a life insurance policy as a result of a beneficiary designation (designation donation).
1. What are the current rules (for deaths before 2016)?
Under the current rules, where an individual makes a donation by will to a qualified donee (QD), the donation is deemed to be made immediately before the individual’s death. Similarly, where an individual makes a designation donation, the donation is also deemed to be made immediately before the individual’s death. For these donations, the Charitable Donations Tax Credit (CDTC) is available to reduce the deceased individual’s income tax otherwise payable in the year of death, and the year prior to the year of death.
A CDTC may also reduce the estate’s income tax otherwise payable for donations made by the estate. The eligible amount of the donation is generally the fair market value (FMV) of the donated property at the time it was made (subject to any reduction required under the Income Tax Act).
2. What are the new rules?
For deaths that occur after 2015, donations made by will and designation donations will no longer be deemed to be made by an individual immediately before the individual’s death. Instead, these donations will be deemed to be made by the individual’s estate and where certain conditions are met, these donations will be deemed to be made by the individual’s graduated rate estate.
3. What are graduated rate estate donations?
These are donations effected by a transfer of property to a QD by a graduated rate estate (defined below). In this case, the donated property must be property that was acquired by the estate on and as a consequence of the death (or property that was substituted for such property). Graduated rate estate donations (GRE donations) also include designation donations.
4. How will a GRE donation be claimed?
GRE donations will benefit from added flexibility. The legal representative of the individual’s estate will be able to allocate a GRE donation among any of:
the taxation year of the graduated rate estate in which the donation is made,
an earlier taxation year of the graduated rate estate, or
the last two taxation years of the deceased individual.
Any unused donation amount can be carried forward from the year in which the donation is made and claimed by the graduated rate estate within the usual limits.
5. What will be the eligible amount of the GRE donation?
The eligible amount of a GRE donation will be the FMV of the property at the time it is donated to a QD (subject to any reduction required under the Income Tax Act). Generally, the same rule will apply to donations made by an estate or trust that is not a graduated rate estate.
6. What is a graduated rate estate?
Effective December 31, 2015, a graduated rate estate of an individual at any time is the estate that arose on and as a consequence of the individual’s death, if that time is no more than 36 months after the death of the individual, and the estate is at that time a testamentary trust.
As there can only be one graduated rate estate in respect of a deceased individual, for an estate to be an individual’s graduated rate estate, the following conditions must also be satisfied:
the estate designates itself, in its T3 return of income for its first taxation year (or if the estate arose before 2016, for its first taxation year that ends after 2015), as the individual’s graduated rate estate;
no other estate designates itself as the graduated rate estate of the individual; and
- the estate must include the individual’s Social Insurance Number in its return of income for each taxation year of the estate that ends after 2015 during the 36 month period after the death of the individual.
7. Who can claim a CDTC in respect of an estate donation that is not considered a GRE donation?
An estate can claim the CDTC in respect of a donation that is not a GRE donation (for example, where the donation is made after the estate ceased to be a graduated rate estate) in the year in which the donation is made or in any of the five following years. The donation cannot however be allocated to a taxation year of the individual or an earlier year of the estate.
8. Under the new rules, will the deemed disposition rule still apply immediately before death to donated capital property?
Yes. Generally, when an individual dies, the individual is deemed to have disposed of all capital property immediately before the individual’s death. This rule will not change.
9. Could these changes result in a gain or loss to the estate when the property is donated to a QD?
Yes. As a consequence of the changes, where the estate of an individual donates property that was the subject of a deemed disposition by the individual immediately before the individual’s death, and the property’s FMV upon transfer to the QD has changed, the difference will result in a gain or loss to the estate that will generally be recognized for income tax purposes. This will be the case whether the donation is a GRE donation or not.
Mr. White purchased a capital property in 2001 for $50,000. In 2005, he prepared a will stipulating that the property was to be donated upon his death to a QD. At the time of his death in 2016, the FMV of the property was $200,000. In 2017, the legal representative of Mr. White’s estate, transfers the property to the QD. At that time, the FMV was $210,000.
In 2016, if the property is not one that benefits from a capital gains exemption mentioned below, the deceased would realize a capital gain of $150,000 ($200,000 - $50,000) because of the deemed disposition of the property immediately before his death. In addition, the estate would have a capital gain at the time of the donation of the property to the QD of $10,000 ($210,000 - $200,000).
The QD will issue a donation tax receipt for $210,000 to the estate at the time of the transfer. If at the time of the transfer the estate is a graduated rate estate, the donation tax credit can be claimed as described in Question 4 above. If at that time the estate is not a graduated rate estate, the donation tax credit can be claimed as described in Question 7 above.
Donations of certain properties (for example, ecological gifts and certain securities listed on a designated stock exchange) benefit from a capital gains exemption where conditions are met. See the P113 Gifts and Income Tax for further information regarding these special rules. (http://www.cra-arc.gc.ca/E/pub/tg/p113/README.html)
If the property in the example above is a property that benefits from a capital gains exemption, the capital gain of $10,000 realized by the estate on the transfer of the property to the QD would be exempt whether the estate is a graduated rate estate or not.
Where the estate is not a graduated rate estate, the capital gain of $150,000 on the deemed disposition of the property immediately before the individual’s death would not be exempt. However, where the estate is a graduated rate estate and the donation is a GRE donation, the capital gain on the deemed disposition of the property immediately before the individual’s death would be exempt.
10. When do these new rules come into effect?
The new rules apply if the individual’s death occurs after 2015.
11. Where can I get more information about this change?
The CRA is committed to providing taxpayers with up-to-date information. The CRA encourages taxpayers to check its webpages often. All new forms, policies, and guidelines will be posted as they become available.
In the meantime, please consult Bill C-43 or the Income Tax Act for details.
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