The Conservative government's 2014 Federal Budget that was presented on February 11, 2014 contains several proposals that will affect the manner in which tax and estate planning practitioners should be advising their clients.

Many of these proposals, such as the elimination of graduated tax rates for testamentary trusts, and the broadening of the definition of “split income”, will restrict or eliminate some of the tax and estate planning tools that are currently employed by professional advisors in the course of structuring their clients’ affairs. However, in contrast to the restrictions that the Budget places on certain tax-planning strategies, other proposals contain measures that would provide estate planners with additional flexibility in dealing with charitable donations made pursuant to the terms of an individual's Will.

The Income Tax Act ("Act") currently provides that charitable gifts made by a person in his or her Will (or pursuant to an RRSP, RRIF, TFSA, or insurance designation) are deemed to have been made immediately before the person’s death, and the resulting charitable tax credit can be claimed against 100% of the taxpayer's net income in the year of death, or in the immediately preceding taxation year (as opposed to the 75% limit for donations that are not made or deemed to have been made in those taxation years). This deeming rule has been troublesome for tax and estate planners as the Act dictates a very specific manner in which donation credits arising from gifts made by Will may be applied, and the application of these deeming provisions may not always produce the most efficient tax result.

The Budget proposes to amend these rules for any taxpayer whose death occurs on or after January 1, 2016. Under the Budget proposal, a gift made by Will would be deemed to have been made by the deceased's estate at the time the property is transferred to a registered charity or other donee in accordance with the terms of the Will, and not in the year of death. In order to be a “qualifying donation” under the proposed rules, the donation would have to be made within the first 36 months after death.

Once a “qualifying donation” is made by the estate, the estate trustee would have the flexibility to re-allocate the donation among any one or more of: (a) the estate’s taxation year in which the donation was made, (b) an earlier taxation year of the estate, or (c) the last two taxation years of the deceased.

This change should be welcome news to the tax and estate planning community as it would replace the existing, rigid deeming provision with a more flexible rule. Under the proposed regime, practitioners would be able to assess where the donation credits could be applied in the most tax-efficient manner and advise estate trustees accordingly.

The Budget proposal confirms that the existing limits with respect to the total donations that are creditable in a taxation year will continue to apply. Therefore, donations that are applied to either of the last two taxation years of the deceased can still be equal to as much as 100% of net income in each of those years, while donations claimed in any taxation year of the estate would be subject to a limit of 75% of the estate’s net income for that year. The 2014 Budget also provides that the 75% limit and the five-year carry forward will still apply to other gifts made by the estate (i.e. those not specifically provided for in the Will).

Unfortunately, the Budget was not accompanied by technical amendments that would provide further insight as to how the proposed rules will operate or clarify what constitutes a gift made by Will. Until such time as more commentary is provided, practitioners seeking to take advantage of the planning opportunities afforded by the proposed rules should ensure that charitable gifts made in their clients’ Wills conform to the requirements expressed by the Canada Revenue Agency. A more detailed analysis of these requirements is given by Elise Pulver in the October 2013 edition of Giving Advice.

Providing greater flexibility in dealing with gifts made by Will introduces tax planning opportunities that are not available under the existing rules. Through this and other initiatives, the 2014 Budget seeks to further support the charitable sector and encourage charitable giving as part of an individual’s estate plan.

Arin can be reached at aklug@robapp.com for further discussion.