skip to content
Contact
Home
Search

Article

Making a charitable donation in your will?

Know the tax implications

Updated: January 24, 2025

A charitable bequest is a great way to leave a lasting legacy. A bequest, or a gift made by your estate through your will, allows you to support charitable causes that you are passionate about. While there may be many personal, non-tax benefits to making a bequest, it can also be used to reduce income tax.

Let's take a closer look at what you need to consider before setting up a charitable bequest.

What are the income tax implications of making a charitable gift through your will?

Charitable bequests are deemed to be made by your estate at the time that the gift is transferred to the charity as opposed to the date of death.

Under Canadian income tax rules, a donation tax credit may be claimed for qualifying charitable gifts that are made by a deceased individual's estate through their will, or by direct designation, if certain conditions are met. The tax credit can be allocated to maximize the benefit of the gift by applying it against income taxes payable associated with the estate or with the deceased taxpayer in the most beneficial manner possible. Provincial or territorial tax credits may also be available.

There is significant flexibility as to how the tax credit can be claimed to reduce taxes provided the gift is made by an estate that qualifies as a graduated rate estate (GRE) or as a former GRE (when all conditions listed below are met except that the 36-month period after death is instead a 60-month period).

In addition to other benefits, GREs within the 36-month period after death are eligible to apply graduated tax rates to income that is retained by the GRE. Trusts other than graduated rate estates are subject to the highest income tax rate possible for income that is retained in the trust and not distributed to beneficiaries. As such, the graduated tax rates in the GRE may result in significant tax savings.

To qualify as a graduated rate estate, all of the following conditions must be met:

  • the estate must arise on and as a consequence of the individual's death;
  • it is no more than 36 months after an individual's death;
  • the estate must be a testamentary trust;
  • the individual's social insurance number must be provided in the estate's first tax return and each subsequent year during the 36 months;
  • the estate must designate itself as the GRE of the individual in its first tax return; and
  • no other estate may designate itself as the GRE of the individual.

Care must be taken to ensure that the graduated rate estate status is not inadvertently lost before the end of the 36-month period. Should an estate cease to be a GRE for any reason, then not only will the estate lose access to graduated tax rates, it will also become ineligible for other beneficial tax treatments, including access to the flexible donation rules. A graduated rate estate can lose its status if someone other than the deceased makes a contribution to the GRE, or in certain circumstances if the GRE makes a loan.

If applicable, care should also be taken for the estate not to lose its former GRE status after the 36-month period after death until the end of the 60-month period after death.

✖ Close

Want practical tax insights delivered straight to your inbox?

The Tax Factor brings you timely analysis and actionable guidance on the tax issues affecting you and your business each month. Subscribe to stay informed.

Thank you for subscribing.

Are there any advantages to your estate making a charitable bequest?

As discussed above, as long as the estate is a GRE or a former GRE, the legal representative of the individual's estate can allocate the tax credit to the following: 

  • the taxation year of the estate in which the donation is made; 
  • an earlier taxation year of the GRE or former GRE; or 
  • the last two taxation years of the deceased individual (i.e., the year of death and the preceding year). 

Any estate can claim a tax credit for a donation in the year in which the donation is made, or in any of the five subsequent years. However, if the estate does not qualify as a GRE or former GRE, the tax credit cannot be applied to an earlier taxation year of the estate or to any of the individual's last two taxation years. This is important as a significant amount of taxes may arise in the year of death.

What type of assets can you donate as a charitable bequest?

A charitable bequest can be a gift of money or other property. The type of asset that you choose to donate can impact how the donation is treated for income tax purposes. For example, where a gift of qualifying securities is made by the GRE or former GRE, an exemption is available from capital gains taxation that would otherwise apply.

Qualifying securities generally include publicly traded shares and units of mutual fund trusts. Under this rule, the capital gain realized on the disposition of such property will not be subject to tax, while the fair market value of the property donated can generally be claimed as a tax credit. Be aware that where there is an advantage associated with the gift (e.g., partial consideration is received in some manner), then only a portion of the capital gain may be eligible for the zero capital gains inclusion rate.

Where a deceased individual's registered retirement savings plan (RRSP), registered retirement income fund (RRIF), tax-free savings account (TFSA), or life insurance proceeds are donated by making a direct beneficiary designation to a charity on death, a tax credit may be claimed by the estate, assuming all other conditions are met.

What do you need to consider before making a charitable bequest?

Bequests should be planned in advance to ensure they are made in the most tax-efficient manner. Keep these key considerations in mind when making a bequest:

Ensure the donation is made to a registered charity or other qualified donee as defined in the Income Tax Act so that it meets the eligibility requirements for the tax credit.

As mentioned, to benefit from the more flexible tax rules for bequests, the estate must be a GRE or former GRE. This means avoiding any transactions that could jeopardize the estate’s status. This can be challenging in cases involving complex estates or those under litigation.

As a tax credit can only be utilized in a tax year where there are taxes payable, planning must be done prior to death to ensure the tax credit will be available in the appropriate year. For example, consideration must be given where a spousal rollover, a capital gains exemption, or a nil inclusion rate on capital gains applies in a tax year. The result may be little to no taxable income, while a donation on death could result in a sizable tax credit. Your BDO advisor can assist with the planning to ensure the tax credit is not lost. 

If a driving force of your donation is to reduce tax, then the exact amount of the donation required to reduce as much tax as possible will be a moving target. If you donate a predetermined sum (for instance $100,000) in your will, then you will need to review your will more often to determine if this amount is still appropriate in your circumstances. On the other hand, gifting a percentage of your estate could allow for some flexibility as asset values fluctuate.

If your goal is to ensure your family is supported while also making a gift to charity, you may want to consider revisiting your financial situation to see if you can make a gift during your lifetime rather than after your death.

Putting it all together

When done properly, charitable bequests can benefit both the donor and the causes they care about. It's clear that planning your donations in advance will ensure the most beneficial tax outcomes. A well-drafted will, one that considers your specific assets, beneficiaries, and the tax implications, will help your family deal with your estate and carry out your wishes during a very difficult time.

BDO can help

We can help you plan a charitable bequest and review your will from a tax perspective. Contact us to get started.

The information in this publication is current as of Dec. 18, 2024.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.