New legislation governing the tax treatment of estate donations will give executors greater flexibility to match donation tax credits with tax liabilities in either the deceased’s personal tax return or the estate return, allowing for more favourable tax planning regarding donations upon death.

“It won’t matter where the tax liability falls, the executor can match up [the donation tax credit],” says Malcolm Burrows, head of philanthropic advisory services with the private client group of the Bank of Nova Scotia in Toronto, regarding the new rules governing estate donations, proposed in the 2014 federal budget. “The executor will have the discretion to figure out which return tax credits are claimed in.”

Estate donations include gifts by will, direct designations of RRSPs, RRIFs, and TFSAs, and the death benefits of life insurance policies. Under current rules, for income tax purposes, estate donations are deemed to be made by the individual immediately before death, and may be claimed against the last two lifetime tax returns of the individual.

However, donations at death may be considered by the Canada Revenue Agency to be donations made by the estate rather than that of the individual. This is sometimes the case, for example, in situations where clear and specific instructions regarding the nature of an intended donation were not made in the will. Tax credits arising from donations made by the estate are only applicable against tax liabilities in the tax return of the estate, and not the individual.

Under the proposed legislation, however, all donations would be deemed to have been made by the estate at the time that the donated property is actually transferred to an eligible charity or qualified donee. The executor of the estate would have the flexibility to claim the donation among any of three taxation periods: the taxation year of the estate in the year the donation is made; any previous taxation year of the estate; or the last two taxation years of the deceased.

“Most often, [the executor] will want the donation to be claimed in the return of the deceased person on their final return,” says Tim Cestnick, president and CEO of Toronto-based WaterStreet Group Inc. Individuals may often generate a large tax liability in the year of death, as all capital property that the individual owns faces a deemed disposition, generating capital gains, and because there may be large proceeds arising from the winding up of an RRSP or RRIF. “In those situations, you want your donations to be claimed on your personal return to offset the tax bill.”

The new rules would also provide greater clarity for charities, which would be able to issue a tax receipt based on the fair market value of the donation on the date of transfer, if it is received by the charity within the first 36 months after death. Under the current rules, the fair market value of a donation is determined at the date of death. Because of this, charities find it tricky to value donations, and issue tax receipts, on donations they haven’t yet received.

This is the second article in a three-part series on charitable giving.

Up next: Family involvement in philanthropy.