Category: Insurance Journal

Claiming tax credits for charitable donations at death

At issue

While donations to charity should always be driven by philanthropic desire, tax issues can influence the manner and timing of a gift.

Our tax system provides a fair amount of flexibility to allow donors to manage the fiscal component in an optimal manner.  Although the charitable tax credit is limited to a donation amount up to 75% of a taxpayer’s net income, any unused amount may be carried forward up to five years.

This carryforward opportunity obviously has limited value for donations made at death.  In recognition of this, special rules have long applied to estate-related donations.  Here are some milestone developments in this field, including the most recent evolutionary proposal from the 2014 Federal Budget.

Section 118.1 of the Income Tax Act (ITA)

This is the section of the ITA dealing with claiming the charitable donations tax credit.  It spans three dozen or so subsections, with the key provisions regarding donations at death in ss.(4) through (5.3).

Rather than the general 75% limit, the donation limit is 100% when claimed in the year of death, or “terminal year”.  Any excess may be carried back to the year prior to death, where again the higher 100% threshold applies. Donations made by way of a donor’s Will are deemed to occur in the donor’s terminal year, and may also be carried back to the prior year.

Federal Budget 2000 – Designations in favour of charity

Up until February 2000, donors faced a conundrum when determining how to make donations sourced from a RRSP, RRIF or life insurance policy.  To take advantage of the deemed donation at death, such proceeds would have to come into the estate, and in turn be donated via the Will provisions.  Of course this would potentially expose those proceeds to estate creditors and administrative delay.

In order to provide consistency in the income tax rules, the 2000 Budget allowed direct beneficiary designations to also be deemed to occur in the donor’s terminal year, with the same carryback provision. It applied retroactively with respect to deaths after 1998.

(The treatment was extended to beneficiary designations from TFSAs once they became available in 2009.)

Federal Budget 2014 – Estate donations

A donation made by an estate may only be applied against the estate’s income tax otherwise payable. As proposed, donations made by will and direct beneficiary designations will now be deemed to have been made by the estate.  For qualified donations occurring in the first 36 months of the estate, the trustee of the estate will have the flexibility to allocate the available donation among any of:

  • the taxation year of the estate in which the donation is made;
  • an earlier taxation year of the estate; or
  • the last two taxation years of the individual

This measure will apply for donations in the context of a death that occurs after 2015.  For other estate donations, the credit may be claimed in the donation year, again with the five year carryforward.

Practice points

  1. This greater flexibility may allow individuals to simplify otherwise more complex estate planning previously put in place to work around some of these hurdles.  A coordinated consultation with lawyer and financial advisor might be considered.
  2. Direct beneficiary designations will continue to be the most efficient route for timely and intact delivery to the charity.  Where the particular plan proceeds may be needed for the estate’s liquidity however, it may be necessary to channel funds through the estate proper.
  3. Where a legacy donation requires conversion to cash, this should provide estate trustees with some welcome relief not to have to rush to dispose of assets.  Of course, they should otherwise perform their duties with due expediency.

Tax treatment of crowdfunding receipts

At issue

You don’t have to be a resident of Toronto to be familiar with the media scrums surrounding its current mayor.  Worldwide interest was piqued midyear 2013 when a gossip website sought to gather funds from the public to purchase an alleged video purportedly showing his worship engaged in compromising activities. No video purchase ultimately resulted, and the gathered funds are apparently headed to charity.

Politics and voyeurism aside, this has brought to the public consciousness an emerging mode of sourcing funds for projects ranging from innovative product ideas to movies and music, known as “crowdsourcing” or “crowdfunding”.  The idea is to collect relatively small amounts from a large number of contributors, generally through social media and the internet.

On the regulatory side, the Ontario Securities Commission conducted a consultation ending in early 2013 to determine how to approach this fast-developing field.

Until recently there has been little guidance on the tax implications of this activity, but by the end of 2013, the Canada Revenue Agency (CRA) had waded in to provide a bit more clarity.

2013-0484941E5 (E) – Crowdfunding

Issued in August, 2013, this CRA technical letter considered a project such as a recording by a musical group or a project relating to developing a product for market.  Each contributor would receive an incentive gift such as a copy of the finished product (for example, a musical recording) or a promotional item such as a T-shirt.  Contributors would not receive any equity.

The author opined that amounts received in this manner would likely be considered business income under ITA s.9(1).  Reference is also made to paragraph 4 of Interpretation Bulletin IT-334R2 Miscellaneous Payments, which states CRA’s view that voluntary payments are taxable when received while carrying on a business.

As quid pro quo, expenses related to crowdfunding efforts, including those incentive gifts, may (depending on the facts) be deductible under ITA s.18(1)(a).

2013-0508971E5 (E) – Crowdfunding, 2013-0509101E5 (E) – Crowdfunding

These two CRA letters, issued within days of one another in October 2013, were penned by the same official with virtually identical content.

The content recounts the nature of crowdfunding, including reference to the fact that some Canadian securities regulators are considering changes to existing rules that may better facilitate the raising of equity funds by way of crowdfunding.  As a given arrangement could represent a loan, capital contribution, gift, income, or a combination thereof, the author states that the CRA would have to review the facts, circumstances and documentation to provide an opinion.

Still, some insight is offered into the (un)likelihood that crowdfunding receipts would be treated as non-taxable windfalls.  Per IT-334R2, a windfall requires at least (1) that the recipient has made no organized effort to receive the payment and (2) that the recipient has neither sought nor solicited the payment.

Practice points

  1. As securities regulators have not yet provided a clear set of rules for crowdfunding, would-be money-raisers should be aware that their actions could at some point be subject to review and possibly sanctions.  This applies doubly-so for investment professionals licensed through some of those same regulatory bodies.
  2. As the general principles approach outlined in the CRA letters suggest, it is likely that many types of receipts obtained through crowdfunding activities will be taxable.  Good records will assist in identifying those sources when required, and in reinforcing claims for associated expense deductions.
  3. There do not appear to be tax issues of any substance for crowdfunding contributors, at least not at this point.  Enjoy the T-shirt.

Validity of an electronic Will

At issue

We are well into the digital era, and some might argue that we are overdue for succession laws to catch up with the times. 

Most Canadian provinces allow for a Will to be executed in a very low-tech form – an individual’s handwriting.  So, why not take our law in the other direction to embrace today’s high-tech world?  Some jurisdictions are doing just that, whether by legislation, judicial interpretation or a combination of the two.  

Here are some examples that may foreshadow our own future.

Estate of Javier Castro 2013 ES 00140, Lorain County Probate Court (Ohio)

After declining a blood transfusion while at an Ohio medical clinic, Javier Castro discussed with two of his brothers his desire to execute a will.  Lacking any paper, one of the brothers transcribed the wishes onto a Samsung Galaxy tablet, which Javier then signed with a stylus.  The two brothers witnessed by the same method.

The document was printed after Javier’s death, and offered for probate.  The judge did not view the document as an “electronic will” (which apparently would not have been valid in Ohio), instead simply finding that it met the definition of a written document.  

NRS 133.085 Electronic will (Nevada)

The State of Nevada specifically authorizes the use of an electronic will.  The legislation has been in place since 2001.

Key among the requirements for validity, there may be only one “original, unique, identifiable and unalterable electronic record of an electronic will.”  As well, any attempted alteration of the authoritative copy must be readily identifiable, and similarly any copies of the authoritative copy must be readily identifiable as such.

Taylor v. Holt, TN Ct. App., October 31, 2003 (Tennessee)

Steve Godfrey prepared a document on his computer.  He invited two neighbours to witness him affixing a computer generated version of his signature to the document, which was then printed, dated and signed by the two witnesses.  Mr. Godfrey died a week later, and litigation ensued between his family and his girlfriend (the latter being named as full beneficiary in the impugned document).

The court upheld the document as a will.  The computer generated signature fell into the category of “any other symbol or methodology executed or adopted by a party with intention to authenticate a writing or record.” (Quotation marks in original, being the relevant extract from Tennessee legislation.)

Re: Yu [2013] QSC 322 (Queensland, Australia)

A distressed man in Queensland, Australia typed a series of entries into the Notes app on his iPhone, and shortly thereafter committed suicide.  

The relevant Queensland legislation identifies the requirements for there to be a valid will.  Where these requirements are not fulfilled, a court may nonetheless accept a document to be a person’s will if it purports to state the testamentary intentions of the deceased person.

Relying upon the jurisdiction’s Interpretation Act and following a similar fact case that considered a Microsoft Word document (Alan Yazbek v Ghosn Yazbek & Anor [2012] NSWSC 594), the court accepted the document created on the iPhone as the deceased’s will.

Practice points

  1. Each province has rules outlining the allowable form a will may take, including the requirement to be in writing. Most provinces also have legislation dealing with the validity of electronic documents and electronic signatures.  Such laws generally do not apply to wills, codicils or trusts created by them.  
  2. The new Wills, Estates and Succession Act, SBC 2009, c.14 comes into force in British Columbia in March, 2014.  Definitions in the section allowing for court interpretation may open the door to documents “recorded or stored electronically.”  
  3. Don’t let your estate be the test case for whether your purported electronic will is valid where you live.  Consult a lawyer.