Written by:

Brittany Sud, TEP, JD, HBA

Associate, Fasken Martineau DuMoulin LLP

The Benefits and Consequences of Charitable Giving by Will

Charitable giving through one’s will not only fulfills philanthropic goals, but it also provides a tax benefit.  When an individual provides for a charitable gift in his or her will, his or her estate is entitled to a donation tax credit.  The donation tax credit may be used to reduce or completely offset the tax liability that arises from the deemed disposition of capital property that occurs on death.

Since January 1, 2016, charitable gifts in a will are deemed to have been made by the estate at the time the property is actually transferred to the charity.[1]  The valuation of the gift for donation tax receipting purposes is the fair market value of the property at the time it is transferred to the charity.  In the year of death and the year prior to death, up to 100% of a taxpayer’s net income can be claimed as donations.[2]  The donated property must be property owned by the deceased at the time of death or property substituted therefor (“Property”).

The Income Tax Act[3] (the “ITA”) provides flexibility in allocating the donation tax credit if the gift is made by an estate no more than 60 months after the individual’s death either while it is a graduated rate estate (“GRE”), or by a former GRE after the date of death if it continues to meet all of the requirements of a GRE except for the 36 month time limit.

A GRE is defined in the ITA as an estate that arose on and as a consequence of the death of an individual if:

1. the estate is at that time a testamentary trust (as defined in the ITA);
2. the executor designates the estate as a GRE on its first estate tax return for the year ending after 2015;
3. no other estate has designated itself as a GRE of the deceased individual; and
4. the deceased’s social insurance number is provided on the estate’s tax return.

A GRE can only last as such for up to 36 months following the date of death of the individual.

If the estate during the foregoing time period makes a donation of Property, the charitable donation tax credit may be allocated among any of the following tax years:

• Year of death of the deceased individual;
• Year prior to year of death of the deceased individual;
• Year of estate that the gift is made;
• Any prior year of the estate that it was a GRE; or
• Five following years of the estate.

If an estate that is not a GRE makes a donation of Property, the estate may claim the donation tax credit in the year in which the donation is made or in any of the five following years of the estate.

Where the Property that is the subject of the donation is publicly listed marketable securities, ecological property or cultural property, the Property will qualify for an inclusion rate of zero on any capital gains realized on such gifts.  It is therefore more tax effective to provide for a gift of publicly listed marketable securities to charity in one’s will than to direct that the shares be sold on death and the net proceeds of sale be donated to the charity, as this would result in 50% of the capital gain being reported for income tax purposes.

It is important to seek professional advice at the planning stage if the intention is to make charitable gifts in a will.  In addition, executors should speak with professionals when it comes time to administer an estate with charitable gifts, as there may be tax consequences pertaining to the timing of donations as well as the property that is being donated.