Volume No. 19-13
Author: Jeannie Lim CPA, CA, TEP, MMPA
Editors: Peter Weissman FCPA, FCA, TEP and Matthew Cho CPA, CA, TEP
It is well understood that qualified donations made by an individual generate donation tax credits in the year the donation is made or the subsequent five taxation years. What are less known are donation “carryback” rules that are available when a donation is made in the year of an individual’s death or certain subsequent years.
Donations Made by Deceased in the Year of Death
Individuals who made donations in the year of death, before they died, can utilize the donation tax credit against their taxes owing in the year before death or the year of death without any income limitation. In general, donations in a year are limited to 75% of the individual’s income for the year. This limit is increased to 100% of the individual’s income for the year before death and the year of death.
Donations Made by an Individual’s Graduated Rate Estate (“GRE”)
Donations made by a GRE in a year can be carried back to the deceased’s year before death, the year of death and any year the estate qualified as a GRE, provided the following conditions are met:
- The estate meets the condition of a GRE without considering the 36 month GRE limitation period;
- The gift is made no more than 60 months after the individual’s death; and
- The gift was property that was acquired by the estate on and as a consequence of death or is property substituted for that property.
Care must be taken to ensure that donations are funded appropriately as funding donations with cash or other assets that were not acquired by the GRE on death will not meet the carryback conditions.
Consider a situation where a GRE holds shares of Opco. Can the GRE use dividends paid to it by Opco to fund a donation? The answer is no. The dividend was not an asset of the deceased on death, and is not considered substituted property held by the deceased (i.e. the shares of Opco). As such, the GRE will not be able to carryback the donation to an eligible year. However, if the shares of Opco are redeemed instead, the proceeds on the redemption will qualify as substituted property for the shares owned at death and the donation can be carried back.
The terms of the decedent’s Will also need to provide the trustees with the power to make donations and the flexibility to meet the required time conditions.
Donations Made by an Alter Ego Trust, Spousal Trust or a Joint Spousal Trust
Occasionally, individuals create these special trusts to facilitate certain objectives. On the death of a contributor, the spouse or the later to die of the contributor and spouse, there will be a deemed disposition of all capital properties held by the trust and all accrued gains will be realized. A deemed year-end will also result. In such cases, subsequent donations made by the trust may be carried back to the deemed year-end caused by death, provided the following two conditions are met:
- The donation is made within 90 days from the trust tax return filing due date for the deemed year-end resulting from death; and
- The gift was property of the trust at the time of the individual’s death or is property substituted for that property.
The filing due date for the trust tax return as a result of the deemed year-end is 90 days from the end of the calendar year in which the relevant taxpayer died. As such, the trustees must ensure the donation is made by this deadline so it can qualify for carryback treatment and be matched appropriately to the tax liability triggered on the deemed disposition.
The tax rules provide some flexibility when dealing with post-mortem donations to allow donation tax credits to be matched appropriately with the tax generated on death. However, care must be taken by estate trustees and their advisors to ensure the conditions for the carryback are met. There are time sensitive restrictions and potentially inescapable traps lying in wait. In short, the benefit of these rules can only be realized with proper planning and execution.
If you have situations involving post-mortem donation planning, a Cadesky Tax representative would be happy to assist you.
TAX TIP is provided as a free service to clients and friends of Cadesky Tax.
The material provided in Tax Tip is believed to be accurate and reliable as of the date of posting. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Cadesky Tax cannot accept any liability for the tax consequences that may result from acting based on the contents hereof.