The Conservative government's 2014 Federal Budget was presented on February 11, 2014 and contains several proposals that will affect many of the strategies that tax and estate planning practitioners currently use to structure their clients' affairs. While some of the proposals will restrict or eliminate some of the tax and estate planning tools that are currently available to professional advisors, others will provide new planning opportunities.
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 that 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. The difficulty with the existing rules is that they dictate 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 for the estate.
The Budget proposes to amend the rules relating to gifts made by Will for any taxpayer whose death occurs on or after January 1, 2016. Under the Budget proposal, a gift made in one's 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 "qualified donee" pursuant to the Will, as opposed to 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. The proposed regime will replace the existing, rigid deeming provision with a more flexible rule that would allow tax and estate practitioners to assess where the donation credits could be applied in the most tax-efficient manner and advise their clients 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 applied to either of the last two taxation years of the deceased can 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).