Making a charitable donation in your will? | Sponsored by BDO’s Scott Conner

The tax implication of making a gift in your will

Charitable bequests are deemed to be made by your estate at the time that the gift is transferred to the charity as opposed to the date of death. Under Canadian income tax rules, a donation tax credit (DTC) may be claimed for qualifying charitable gifts that are made by an individual either through their will, by their estate, or by direct designation, if certain conditions are met. The DTC can be allocated to maximize the benefit of the gift by applying it against income taxes payable associated with the estate or the deceased taxpayer in the most beneficial manner possible. 

Provided the charitable bequest is made by an estate that qualifies as a Graduated Rate Estate (GRE), there is significant flexibility as to how the DTC can be claimed to reduce taxes. In addition to other benefits, GREs are eligible to apply graduated rates to income that is taxed in the trust. To qualify as a GRE, an estate has several conditions to meet including it must be a “testamentary trust” at all times during the 36-month period following the individual’s death.

Are there income tax advantages in making a charitable bequest?

GREs can only exist for 36 months following the death of the individual. Donations made by the GRE within this period can be allocated by the legal representative to either:

  – the taxation year of the GRE in which the donation is made;

  – an earlier taxation year of the GRE; or

  – the last two taxation years of the deceased individual.

What type of assets can you donate?

A charitable bequest can be a gift of money or other property. The type of asset that you choose to donate can impact how the donation is treated for income tax purposes. For example, where a gift of qualifying securities is made by the GRE, an exemption may be available from capital gains taxation that would otherwise apply. Qualifying securities generally include publicly traded shares and units of mutual fund trusts. Under this rule, the capital gain realized on the disposition of such property will not be subject to tax, while the fair market value of the property donated can generally be claimed as a donation credit.

Charitable bequest planning

Charitable bequests should be planned in advance to ensure they are made in the most tax-efficient manner possible. Keep these key considerations in mind when making a charitable bequest:

• Maintain the GRE status – As mentioned, to benefit from the more flexible tax rules associated with making a charitable bequest, the estate making the gift must be a GRE. This means avoiding any transactions that may cause your estate to lose its status as a GRE.
• Match the donation credit to a tax year with taxes payable – As a DTC can only be utilized in a tax year where there are taxes payable, planning must be done prior to death to ensure the credit claim will be available in the appropriate year. 
• Consider gifting a percentage – a driving force of your donation is to reduce tax, then the exact amount of the donation required to reduce as much tax as possible will be somewhat of a moving target. If you donate a predetermined sum in your will, then you will need to review your will more often to determine if this is enough or too much. On the other hand, gifting a percentage of your estate could allow for some flexibility.
• Consider the timing of your gift – it may make more sense to make a gift in your lifetime, rather than after your death, to maximize the tax benefit.

Charitable bequests can benefit both the donor and the causes they care about. Contact your BDO advisor to assist you when planning to make a charitable bequest.