New Legislative Proposals: Charitable Donation Tax Credits for Trusts

Finance Canada recently released proposals to amend certain sections of the Income Tax Act (the Act) pertaining to the tax treatment of certain trusts, which only came into force on January 1, 2016. To the relief of many tax and legal practitioners, the proposals remedy some undesirable aspects of the amendments,  especially as it relates to charitable giving.

To refresh your memories, one major change regarding trusts was the implementation of the Graduated Rate Estate (GRE). All trusts, with the exception of the GRE (and certain trusts for disabled beneficiaries) are taxed at the highest marginal tax rate (33% federally) as of January 1, 2016.  This will have significant impact on planning for high net worth families in particular.

When a taxpayer dies, one or more testamentary trusts may be created by the will. One of these trusts may declare itself to be the GRE for the deceased taxpayer. That trust will be subject to the same graduated income tax rates available to individual taxpayers for a period of 36 months following its creation. After the 36 months have passed, if the trust continues to exist, it is subject to the maximum tax rate like any other trust.

For bequests to charities (donations made in the will) made prior to 2016, the donation was deemed to have been made immediately prior to death and the donation tax credit for those donations could be claimed on the final individual return or, if there was not sufficient income in the year of death, the donation could be claimed on the return for the immediately preceding taxation year.

For donations made after 2015, the donation is deemed to have been made at the time the donation is actually transferred to the charity, if it is transferred by the GRE. The executor can then claim the donation tax credit on any of the following returns:

• The estate return for the year the donation was made
• The estate return for a prior year
• The final return for the deceased taxpayer
• The deceased taxpayer’s return for the year immediately preceding death

This change allows the estate to take advantage of large donation credits which would have been lost if the donation exceeded income for the year of death and preceding year. As the graduated rate estate will exist for only 36 months, the donation must actually have to be transferred to the charity within the 36-month period to qualify for this treatment.

The new proposals would extend the allowable period to 60 months after death.  In other words, if the successor trust to the graduated rate estate transfers the donated funds within the first two years of its existence, the trustee may claim the donation credit in that year, any prior year of the trust, or on the final two returns for the deceased taxpayer. That’s good news for executors!

Additional Educational Resources:  Use of Trusts in Tax and Estate Planning course, Final Returns on Death of a Taxpayer course and Investment Strategies in Charitable Giving coruse.

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