This TI is interesting because it describes certain scenarios in which a donation would be claimed on a deceased individual's terminal return rather than in a spousal trust's trust return.
A deceased taxpayer's will provides for a spousal trust which includes the right to allow the trustees to encroach on the capital for the benefit of the surviving spouse. The will also provides for a fixed amount donation to a particular named charity to be made on the death of the surviving spouse.
The taxpayer asks, based on this hypothetical scenario, whether the donation would give rise to a credit as allowed by subsection 118.1(5) in the deceased's final return and, if not, whether the spousal trust would be entitled to the donation credit under subsection 118.1(3), which provides individuals with a deduction (credit) for charitable gifts.
A charitable donation may be claimed in an individual's (deceased) terminal return under subsection 118.1(5), where the gift was made "by the individual's will". The CRA considers a "gift by will" to be made when certain conditions are met.
Scenarios where donation is claimed on deceased's terminal return
In the TI, the CRA states that the tax implications of a testamentary gift to a registered charity (or other qualified donee) generally depends on the terms and conditions of the deceased's will. A donation is deemed to have been made, for tax purposes, and may be claimed in the deceased's final T1 personal income tax return where the amount given to a registered charity (or other qualified donee) constitutes a gift "by the individual's will", within the meaning of subsection 118.1(5).
When the gift is completed, it is deemed to have been made immediately before the individual died. To the extent that an amount of the gift cannot be claimed that year, the gift is deemed to have been made in the year before death. Further, no amount of a gift by the individual's will may be claimed in a T3 trust income tax return.
The CRA also states that where the terms of a will show an intention to create a testamentary trust that is a spouse or common-law partner trust (i.e., a spousal trust), with a specific amount or assets remaining to be distributed to a registered charity (or other qualified donee) on the spouse's or common-law partner's death, the tax consequences of the charitable gift depend on whether the charity is receiving an equitable interest in the spousal trust that would reasonably be regarded as a gift by the individual's will. In general, where the will directs the trustee to make a donation to the charity of a specific property, a specified amount or a specific percentage of the residue, and it is clear from the terms of the will that the trustee is required to make the gift, once completed the gift would likely constitute a gift by the individual's will of an equitable interest in the spousal trust and not a gift of property that could be claimed by the trust.
The CRA states that where the will reflects a clear donative intent, but the trustee has some degree of discretion respecting the gift, it is a question of fact whether any distribution of property to the charity from the trust is a gift made by the individual's will. For example, where encroachment in favour of the spouse is limited to all trust property except the specific amount or particular property to be donated upon the surviving spouse's death, as directed by will, it would be reasonable to conclude that the gift would qualify as a gift under subsection 118.1(5). This may be the case where the spousal trust provides that the surviving spouse can use a specific property during his or her lifetime, the property is clearly excluded from a possible capital encroachment by the trustees and on the surviving spouse's death the charity would receive the property.
Scenario where donation is claimed on trust's return
On the other hand, the CRA states that where it is clearly left to the trustees to decide whether or not a gift to a registered charity (or other qualified donee) will be made, and it is clear that the gift was completed after the death of the spouse or common-law partner, the CRA's practice is to allow a charitable gift to be claimed by the trust. In addition, for a tax credit to be claimed under subsection 118.1(3) of the Act by the spousal trust in the taxation year the spouse dies, the CRA's view is that trust property would have to be transferred by the spousal trust to the charity before the end of the year.
The CRA states that, where unrestricted powers of encroachment exist, it may accept that a gift has been made by will under subsection 118.1(5), provided that the spouse irrevocably disclaims her or his interest in the capital (or the specific property) and the trustees undertake not to exercise their authority to make capital (or the specific property) of the trust available to the spouse.
Bar Association calls for targeted relief
In a related development, the Canadian Bar Association Wills, Estates and Trusts section (CBA) has recommended to Finance that it make charitable giving easier for Canadians as part of the government's review of the current tax incentives for charitable donations. In its December 19, 2011 submission, the CBA recommends the following six specific technical amendments to the Income Tax Act:
- Expand meaning of gift by will
- Allow gifts to be made by an estate
- Allow flexibility in transferring an estate's unused gift portion
- Expand the definition of gift to include transfer of a capital interest of a trust
- Allow gifts on termination of a life interest
- Introduce new trust giving anti-avoidance rules to avoid double dipping.
The CBA notes that its proposed tax amendments are not intended to create additional tax benefits for charitable giving, but rather make the existing rules and tax benefits of charitable giving more equitable, intuitive, accessible and rewarding. The CBA argues that these recommendations would result in greater tax efficiency and fairness and simplify estate planning by removing arbitrary and unnecessary distinctions and advance the existing public policy purpose of the Act to encouraging charitable giving.
For more information, contact your KPMG adviser.