Estate – Page 4 – Doug Carroll

Whether a surviving spouse can claim donations of deceased spouse

At issue

Most tax credits are limited in value to the lowest bracket tax rate. The charitable tax credit is generally more lucrative, as it is claimed based on two tiers. Federally, the lowest bracket rate applies on the first $200 of annual donations, with any excess entitled to a credit at the top bracket rate. (Provincial credits operate similarly, though not all are exactly at the top bracket rate.)

For spouses, there is a further benefit available via administrative practice of the Canada Revenue Agency. CRA recognizes that donations are generally made based on the family unit, despite that one name may appear on a donation receipt. Accordingly, the agency allows donations to be claimed on the return of either spouse or common law partner. This simplifies reporting and efficiency of credit use, at the very least helping elevate past the $200 threshold.

Until recently, spouses could also depend on a related CRA administrative practice on the death of a spouse, but after 2015 it is no more.

2010-0372621E5 Donation by will claimed by spouse

The CRA was asked whether an individual can claim a tax credit for a charitable donation made by his/her deceased spouse’s will in the year in which the spouse died.

The response cited the CRA’s general administrative position on donations on behalf of a family unit. It went on to highlight ITA s.118.1(5) (as it was at that time), which deems charitable gifts made by an individual in his or her Will to have been made by the individual in the year of death and not by the estate. This is despite that the executor/estate really carries out the donation, and that it may not actually occur until a later year altogether.

The writer then stated that the deceased’s executor and the surviving spouse (which could very well be the same person) are entitled to claim the tax credit in the most beneficial manner available. Thus, supported by the deemed timing of the donation, a spouse would be entitled to claim the donation on his/her own return for the year in which the spouse died.

Bill C-43, Royal Assent (2014-12-16)

This Bill enacted provisions of the February 11, 2014 federal budget.

The definition of “total charitable gifts” in s.118.1(1) was replaced, including explicit acknowledgement for either the individual or his/her spouse or common law partner to claim donations. This somewhat codifies the past CRA administrative practice with respect to the family unit, except that this treatment does not apply to donations made by a trust.

In that latter respect, new provisions were also enacted to deal with donations made by Will. Such donations would no longer be deemed to occur in the year of death. Rather, the donation could be claimed in the year it is actually made, with the executor (on behalf of the estate, which is a trust) having discretion to claim the donation in any earlier estate year, in the terminal year or the year prior to death.

2014-0555511E5 E – Spousal sharing of charitable gifts

On November 7, 2014 (while Bill C-43 was still making its way through Parliament), a taxpayer inquired whether the CRA would continue to apply its administrative position from letter 2010-0372621E5.

The CRA response was issued January 27, 2015, citing the amended definitions and deeming provisions outlined above. Given these amendments, the CRA’s administrative practice as stated in the 2010 letter will no longer apply for deaths occurring after 2015.

Practice points

For modest donations (relative to prevailing income), it is likely that the full value of the credit will be able to be claimed through the carryback to the deceased’s terminal year or the year prior to death. Where the donor has little income, the inability of a surviving spouse to report the donation may mean that some of the credit value may be unusable.
The Bill C-43 amendments also encompass donations made by beneficiary designation under life insurance and through registered plans.
Those who have strategically planned their charitable giving may wish to consult with their philanthropic and tax advisors whether reconsideration and revision may be warranted. For some, it may swing the balance toward lifetime gifting, rather than being exposed to potential uncertainty in the estate.

Tax relief on charitable donations at death: More flexibility for executors and estates

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 carry-forward 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 development coming out of the 2014 Federal Budget.

Section 118.1 of the Income Tax Act (Canada)

This is the section of the Act dealing with claiming the charitable donations tax credit. It spans three dozen or so subsections.

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.

As discussed below, there are modifications coming out of the 2014 Federal Budget, but the foregoing rules will continue to apply for deaths occurring before the end of 2015.

2000 Federal Budget Designations in favour of charity

Up until February 2000, donors faced a conundrum when determining how to make donations sourced from a registered retirement savings plan, registered retirement income fund or life insurance policy. To take advantage of the deemed donation at death, such proceeds had to come into the estate, and in turn be donated via the Will provisions. Of course, this potentially exposed those proceeds to estate creditors, probate tax (where applicable) and administrative delay.

In order to provide consistency in the income tax rules, the 2000 Federal 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 tax-free savings accounts once they became available in 2009.)

2014 Federal Budget – Estate donations

A donation made by an estate will initially be applied against the estate’s income tax otherwise payable. Donations made by Will and direct beneficiary designations will now be deemed to have been made by the estate. However, 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 when death has occurred after 2015. For other estate donations (i.e., past the 36-month limit), the credit may be claimed in the donation year, again with the five-year carryforward.

For testator/donors, this greater flexibility may allow individuals to simplify otherwise more complex estate planning previously put in place to work around then-existing hurdles.

For executors, not having to rush to dispose of assets will doubtless provide some welcome relief. Prior to this change, a donation by Will had to occur within the estate’s first year in order to qualify for carryback. This was particularly challenging where the estate was named as a residual beneficiary, since most of the estate activity had to be complete before determining the donation value, let alone delivering the cheque. With the longer timeframe now available, executors may take more time to realize assets with greater due diligence. Of course, they should otherwise perform their duties with appropriate expediency.

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. A coordinated consultation among executor, lawyer and financial advisor should help guide the options and implement the plan.

Executor’s power and constraints in disposing human remains

At issue

A Will enables a person to name an executor to carry out the Will’s terms. The executor becomes legal owner of the property for the purpose of maintaining and eventually distributing assets to the estate beneficiaries.

Generally, the executor also has the authority and obligation to deal with the body or ‘human remains’ of the deceased. However, this is not the same as ownership interest over property, and depending on province, the executor’s powers may be affected by the deceased’s statements or actions prior to death. Here are some examples.

Trillium Gift of Life Network Act, RSO 1990, c H.20

In Ontario, a person may give consent to the use of his or her body after death for “therapeutic purposes, medical education or scientific research”. The person must be at least 16 years of age to give consent. The consent must either be in writing, or have been uttered in the presence of two witnesses at the time of the person’s last illness.

Upon the person’s death the consent is binding, though there can be an exception if it is there is reason to believe that the consent was withdrawn. By implication, the withdrawal of consent can only come from that person.

Cremation, Interment and Funeral Services Act, SBC 2004, c 35, s. 6

In British Columbia, an executor will be bound by instructions that a deceased person has given with respect to disposition of human remains or cremated remains, so long as:

“(a) the preference is stated in a will or pre-need cemetery or funeral services contract,

(b) compliance with the preference is consistent with the Human Tissue Gift Act, and

Civil Code of Québec, LRQ, c C-1991, article 42

Quebec allows a person to provide direction as to both funeral and final remains. In fact, even a minor may do so. Per article 42 of the Civil Code (produced in part here),

“A person of full age may determine the nature of his funeral and the disposal of his body; a minor may also do so with the written consent of the person having parental authority or his tutor.”

In Re: Estate of Freddy Todd Loucks, 451 MDA 2013

Of interest, this Pennsylvania case shows the extent to which some people may go to maintain control over human remains.

Fred Loucks died in a vehicle crash at age 43. His son Cameron was named estate administrator. Disputes with the father’s “paramour” Monica Miller brought the estate to the courts a number of times. This included claims to the deceased’s ashes, with Ms. Miller eventually being ordered to deliver the urn to the funeral home to be divided in half.

It was later suspected and confirmed that the contents were not human ashes. Ms. Miller was found in contempt of court, and imprisoned for six months.

Practice points

Though the executor may have broad authority pursuant to provincial law, this is not absolute in nature. There remain a number of obligations under common law that an executor must bear in mind when exercising the authority, the nuances of which can be discussed with a lawyer if problems appear to be arising:

Disposal of the remains must be in a dignified manner. Generally burial or cremation would satisfy this requirement, despite that some religions may be against cremation.
Funeral/memorial services and disposition of the remains should take into consideration the deceased’s station in life, and consider the proportionality to the estate assets, particularly where this materially affects estate creditor claims.
The executor is expected to provide reasonable information about these matters to next of kin, and to do so in a timely manner.