Tax Articles
ESTATE PLAN
The Legacy
Len Vandenberg, CA
Canadians are a charitable people. Each year millions of us give billions of dollars to worthy causes, many of those donations included as part of our wills, where it’s important to know how to make the right kind of donation. A charitable bequest not only ensures monies or properties reach their intended beneficiary but also work to keep your estate’s tax bill as low as possible.
Ultimately, the Canada Revenue Agency (CRA) determines whether a gift to a charity will be treated as a bequest made under the terms of the will or simply just a gift by the estate. The distinction is important as a charitable bequest can be claimed on your tax return for the year of death or the previous year. In many cases, an estate may have little income, so a large estate donation may not be utilized.
The CRA has set strict conditions that must be met for a gift to qualify as a bequest:
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It is clear the deceased intended to make a donation to charity;
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The amount of the gift is set as a fixed dollar amount or as a specific percentage of the deceased's estate or the estate residue;
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Where the gift is a percentage of the estate residue, the will clearly specifies what is to be paid from the estate in determining the amount of any residue; and
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The will does not provide for discretionary capital encroachments by the trustees of the estate or others.
As mentioned, the chief benefit of a charitable bequest is that it can be claimed in the year of death and the previous year. Income in the year of death can be high because accrued gains on assets are taxed and the value of your RRSPs and RRIFs also come into income. A claim in the prior year is also allowed, as income for the year of death could be low for an individual who dies early in the year and does not have significant RRSPs, RRIFs or property with accrued gains.
A donation claim for an ordinary gift by an estate cannot exceed 75 per cent of the estate’s income for that year. If the gift is recognized as a bequest, however, that limit is waived so that tax in the year of death and the previous year can be completely eliminated if the gift is large enough.
By donating your property as a bequest, you will have continued access and use of the property until death. However, delaying the donation until death does not always yield the best tax result. For instance, it may not be possible to fully utilize a large bequest if there is insufficient taxable income in the year of death and the previous year to use up the tax credit. A possible solution is to make such gifts throughout your lifetime.
These rules might seem straight forward. But as any professional will tell you, nothing in tax is as clear as it may seem. An important point to keep in mind is that the tax treatment of the gift at death will be governed by the terms of your will and the result can’t be changed by your executor, so it is crucial to obtain professional assistance where a will contains a substantial gift. A specialist can strike the right balance between giving your executor as much flexibility as possible while ensuring the estate receives the maximum tax benefits allowed from a bequest.
Of course, there’s much more to this area than can be touched upon in one short article. If you have any questions about either bequests or estate planning, contact your professional advisor for help.
Len Vandenberg is the head of BDO Dunwoody’s Tax Group for our Region. As an income tax specialist Len has been dealing exclusively in income and estate planning issues since 1984. He can be reached at (250) 763-6700; lvandenberg@bdo.ca.
