There are many reasons why people choose to make charitable donations in their Wills. For some it is a way to ensure their memory lives on;  for others it is a way to ensure that the donee charity uses their funds to continue its important work. Surprisingly, many Canadians are not aware of the generous income tax benefits which are available to those who make a proper charitable “gift by Will.”

In order to understand the benefits of making a charitable gift in a Will, it is first necessary to understand some basic rules that apply on the death of a Canadian taxpayer under the Income Tax Act (Canada) (the “Act”).

Under the Act, except where property is left to a surviving spouse, a taxpayer is deemed to have disposed, immediately before his or her death, each capital property that was owned by the taxpayer at that time for proceeds of disposition equal to the fair market value of such property at the time of the deemed disposition. The effect of the deemed disposition is that all accrued gains and losses of the deceased taxpayer up to the time of his or her death must be included in the computation of his or her income in their “terminal return”. This is in addition to his or her “ordinary” income earned in the year of death (i.e. income from employment, income from business, investment income, etc.).  The result of the increased income inclusion in the year of death is often a higher income tax liability unless appropriate planning is in place.

One way to reduce a taxpayer’s liability in the year of death is by making a charitable “gift by Will,” which results in a donation credit that can be used to reduce such liability.  Basically, the Act allows a donation tax credit to be used against 100% of the taxpayer’s income for the year of death, as opposed to the limit of 75% of income that normally applies.  To the extent the donation credit is not fully utilized in the year of death, it can be carried back to the taxation year preceding the year of death.  The result is that the deceased can potentially eliminate his or her income tax liability in the year of death or immediately preceding taxation year if the donation meets the conditions described below.

The starting point for claiming a donation credit in the year of death is subsection 118.1(5) of the Act.  That subsection generally provides that where an individual “by the individual’s will” makes a gift, the gift is deemed to have been made by the individual immediately before the individual died. 

It is essential that an estate planning lawyer strictly comply with the “gift by Will” rules and be familiar with the CRA’s interpretation of the phrase “by the individual’s will”.  Otherwise, the donation tax credit cannot be claimed in the year of death.  If the donation clause in the Will is improperly drafted, the donation credit can still be claimed, but only by the estate in its tax return. In that case, the tax saving will likely be reduced as often the income earned in the estate is far less than the income earned by the deceased taxpayer in his year of death or even the previous taxation year.

The CRA has interpreted the phrase a “gift by Will” to mean that a Will must require a personal representative (generally the Estate Trustee) to transfer a specific property or amount (including a gift of the residue or a specified portion of the residue) to a recipient that is a “qualified donee”. Generally speaking, a charity registered under the Act is a qualified donee. An amount is considered to be specific if the personal representative does not have any discretion as to the amount of the gift. The decision to make a gift, or the amount of the gift, cannot be left to the discretion of the personal representative. The CRA has said that it is a question of fact whether a donation will qualify as a “gift by Will” and it will look to the language used in the Will to make this determination.
What happens if the deceased does not specifically name a charity? What if he or she clearly has a general charitable intent to leave a specific portion of his or her estate to a charity or charities, but prefers to leave the decision to the personal representatives?

In a 1998 CRA interpretation, CRA stated that “in the absence of each qualified donee being named in the Will along with the amount each such donee is to receive, it is our general view that the gift will not be considered to have been made by an individual in the individual's will. (underline mine)”   Fortunately, in 2001, CRA released a more generous interpretation (document no. 2001-0090205) that stated that it may not be necessary to provide the personal representatives with a list of possible charities, provided that the following conditions are met:

• the terms of the Will provide for a donation of a specific amount or property;
• a specific amount or a percentage of the residual of the individual’s estate will go to charity;
• it is clear from the terms of the Will that the trustee is required to make the donation;
• the estate is able to complete the donation after the payment of its debts; and
• the donation is made to a qualified donee.

The 2001 CRA interpretation has given personal representatives greater flexibility when making charitable gifts. Now, personal representatives can chose which charities they wish to benefit if the testator gave them the discretion to do so.  It is also an opportunity for a charity to receive a donation that was not specifically made in the Will.  Notwithstanding the greater flexibility, the CRA is still firm with respect to its policy that where there is discretion related to the making of the gift or the amount thereof, the gift will not qualify as a “gift by Will.”