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Gifts by Will: The new rules are here, but more changes may be coming |
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Fast-forward nearly two years and the new regime for the tax treatment of gifts made by Will is now in place. The new rules, which came in to effect on January 1, 2016, apply to deaths that occur any time after 2015. This article will review the new regime as well as some recent legislative proposals which, if implemented, would further enhance the flexibility provided under the new rules. Prior to 2016, the Income Tax Act (the "Act") deemed gifts made by Will to have been made immediately prior to the death of the donor. The resulting charitable donation tax credits could be applied to either of: (i) the year of death; or (ii) the immediately preceding taxation year. In contrast, the new rules provide that gifts made by Will are deemed to be made by the estate of the deceased person at the time the gift is actually transferred to the donee. As was the case prior to 2016, the donation credits arising from gifts made by the deceased individual's estate (or deemed to have been made by the estate under the new rules) can be carried forward for up to five years (or 10 years in the case of ecological gifts) and claimed against the estate's income in those years, to a maximum of 75% of net income. Additionally, the new rules provide that if the estate is a "graduated rate estate" (a "GRE") at the time the gift is made and the gift is either: (i) made pursuant to a beneficiary designation; or (ii) is a gift of property that was acquired by the estate as a consequence of death (or substituted property), then the executors will also have the ability to allocate the donation (and consequently the resulting donation credits) among: (i) the last two taxation years of the deceased person; (ii) the taxation year of the estate in which the donation in made; and (iii) any previous taxation year of the estate. As before, donation credits allocated to the last two taxation years of the deceased may be claimed against up to 100% of the person's net income in those years. The concept of the GRE is a recent addition to the Act and the benefits associated with being a GRE extend well beyond the ability to allocate charitable donation credits among different taxation years. In order for an estate to qualify as a GRE at a particular time, the following conditions must be met: (i) no more than 36 months have elapsed since the death of the individual; (ii) the estate is a testamentary trust; (iii) the Social Insurance Number of the individual is provided on the estate's taxation year and all prior taxation years; (iv) the estate designates itself as a GRE in its first taxation year after 2015; and (v) no other estate designates itself as a GRE of the individual for any taxation year ending after 2015. Accordingly, assuming all proper steps are taken, the general estate of a deceased person may qualify as a GRE for up to 36 months following the date of death, and therefore in order to take advantage of the flexibility afforded by the new rules, gifts made by Will must be made out of the GRE within this period of time. Additionally, the Act has been amended to provide that the capital gain that would otherwise arise on a publicly traded security as a consequence of death is deemed to be zero, provided that the security is the subject of a gift to a qualified donee from an estate that is a GRE. Notwithstanding the beneficial treatment of gifts made by Will under the new rules, concerns have been raised over the limited time period during which the gifts must be made in order to benefit from the new rules (i.e. within 36 months of death). In particular, it has been noted that complex estates, estates with illiquid assets, and estates that are involved in litigation may not be in a position to make the gifts within the time necessary to take advantage of the flexibility afforded by the new rules. Fortunately, draft legislative proposals released by the Department of Finance on January 15, 2016 may help to alleviate some of these concerns. The effect of the proposed amendments is to extend the 36 month window during which a gift must be made for a period of 24 additional months (60 months in total). Although an estate will still cease to qualify as a GRE after 36 months, a gift made from an estate prior to 60 months from the date of death will still be allocable under the new rules, provided the estate continues to meet all of the other requirements of GRE status (i.e. the estate has only ceased to be a GRE because more than 36 months had elapsed from the date of death). Assuming these requirements are met, the zero capital gains inclusion for gifts of publicly traded securities would also apply for the full 60 month period following death. Where an estate that is no longer a GRE otherwise qualifies for the above-noted extension by virtue of the gift being made no more than 60 months after death, the draft legislative proposals only provide the flexibility to allocate the charitable donation credits between: (i) the taxation year in which the donation is made; and (ii) the last two taxation years of the deceased (but not in a prior taxation year of the estate). The Explanatory Notes that were released with the draft legislative proposals do not address this omission, and so it is not clear whether The Department of Finance ("Finance") intended that donation credits could not be carried back to a prior taxation year of the estate in such circumstances, or whether the provision to make such an allocation was omitted in error; Finance is accepting comments on its draft legislative proposals until February 15, 2016. Tax and estate planning advisors should ensure that they are familiar with the manner in which the Act now deals with gifts made by Will, particularly as they relate to the conditions for allowing the tax credits arising from such donations to be allocated among various taxation years of the estate and the deceased. In addition to familiarizing themselves with the new rules, advisors should also be on the lookout for changes to the new regime in the near future. Arin can be reached at aklug@robapp.com for further discussion. |
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