Estate – Page 4 – Doug Carroll

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.

Discharge of a deceased bankrupt

At issue

As one of its main objects, bankruptcy law seeks to provide relief to those who might otherwise face an interminable condition of debt servitude. The bankruptcy process fosters their rehabilitation to again be effective economic contributors.

Under the Bankruptcy and Insolvency Act (BIA), insolvency is the state of being unable or unwilling to pay one’s debts as they come due. Alternatively it can be measured as having less net realizable assets than one’s current and accruing debts.

Bankruptcy is the legal status of a person who has either him/herself made an assignment, or against whom a bankruptcy order has been issued, following which that person’s assets generally form the bankrupt estate. Discharge is the step whereby a person is released from the legal status of being a bankrupt.

How then might a discharge be reconciled where a bankrupt estate is that of a deceased person?

Re Simoes, 2011 BCSC 63

In this set of four applications before a registrar sitting in bankruptcy chambers, all of the subject bankrupts were deceased. As the judgment details, the law surrounding discharge of a deceased bankrupt is thin, and therefore the registrar took it upon himself to research the matter in order to provide context for the decisions, and guidance in future matters.

There are three competing interests involved in a discharge application, being those of the bankrupt, the creditors and the public’s faith in the integrity of the system. Rehabilitation of the bankrupt is obviously moot where the bankrupt is deceased. With respect to creditors and the public interest, the personal representative of the deceased could be called upon in appropriate circumstances to make a payment into the bankrupt estate to ascertain a conditional discharge.

In three of the cases before the court, the registrar determined that the respective bankrupt was in substantial compliance with his or her legal obligations, and an absolute discharge was granted. In the fourth case, the trustee had filed an objection, but the registrar could find no evidence that the shortcomings were willful, so ordered a brief one-week suspension before granting the discharge.

Bankruptcy of Lyle Coleman, 2011 MBQB 300

Lyle Coleman died in March, 2009. His daughter was appointed as administrator of the estate in February 2011, and shortly thereafter in March 2011 she obtained leave from the court for an assignment of the estate into bankruptcy.

In support of the present application for discharge, the bankruptcy trustee reported to the court that “all of the assets of the deceased have been liquidated and distributed in conformity with the provisions of the BIA.”

The judge lauded praise upon the daughter for her “commendable behaviour” as estate administrator in undertaking the bankruptcy assignment “without any possibility of personal benefit to herself.”

Still, he distinguished the Simoes cases under which the living person made the assignment, as compared to the present estate administrator’s initiation. Further, he emphasized that there is no practical effect of the BIA‘s rehabilitative objective if a bankrupt is deceased.

The judge then declined the discharge based in the main on the possibility that there may be “pay equity benefits, unknown but now valuable fractional mineral rights” and other potential future receipts. Of note, he earlier acknowledged that “the assets and debts could be considered as modest”, with the realized assets having been $17,000 for distribution among eight creditors claiming $23,000.

Practice points

Clearly an estate administrator should tread carefully before making a bankruptcy assignment, lest the result be an open-ended commitment as in Coleman.
It should be emphasized to a person in the midst of debt problems how important it is to maintain existing life insurance in force. The proceeds could obviously provide direct estate liquidity. As well, where the estate contains assets that have emotional value, a direct insurance beneficiary could nonetheless choose to contribute into an estate to secure a conditional discharge, rather than allow those assets to be liquidated in order to pay out creditor claims.