Mar 2018 Charity & NFP Law Update
On March 7, 2018, the CRA released Interpretation 2017-0698191E5, “Gift of securities by executors of a will” that addresses the income tax implications of three hypothetical scenarios involving gifts made by executors of the estate of a deceased individual. More specifically, the facts presented to the CRA described a will in which there was no designation of the amounts to be given to charities, although the three co-executors were given flexibility to make donations in their discretion. It was also indicated that the deceased’s assets included a mutual fund investment account with a $4 million total fair market value with an inherent capital gain of $1 million. In response, the CRA addressed the resulting tax implications of this situation by way of three different scenarios.
The first scenario addressed whether a charitable donation of $500,000 cash from a graduated rate estate’s (“GRE”) sale of mutual fund units could be used to offset personal taxes owed on the deceased’s final return. In this regard, the CRA stated that, subject to subsection 118.1(13) of the Income Tax Act, a gift made by an estate is deemed to be made by the estate, as opposed to by the deceased, under subsections 118.1(4.1) and (5). It further stated that the cash would constitute property substituted for the property that the estate acquired on and as a consequence of the death of the deceased for the purposes of paragraph 118.1(5.1)(b), concerning gifts by GREs. Therefore, the donation credit could be claimed on the deceased’s final return pursuant to clause 118.1(1)(c)(i)(C) on the definition of “total charitable gifts.”
The second scenario considered the same facts as the first scenario with the exception that the donation is in-kind rather than cash. In this regard, the CRA stated that where subsection 118.1(5) applies to a gift, the gift is not considered to be made until the gifted property is transferred. While the capital gain on mutual fund units would be calculated at the time of death, subparagraph 38(a.1)(ii) provides for a nil taxable capital gain where the property disposed of is a unit of a mutual fund corporation or trust and the gift is subject to subsection 118.1(5.1) and is made by a GRE to a qualified donee.
The third scenario was also a donation in-kind as in the second scenario. However, the question was whether the capital gain from an increase in the fair market value of the mutual fund units between the time of deemed disposition immediately before death and the time of the units’ transfer to a qualified donee would also be eligible for a nil taxable capital gains. The CRA answered that the difference between these two values will result in a gain or a loss to the estate, as applicable. However, where the gift is given to a qualified donee and the taxable capital gain of that gift is nil pursuant to paragraph 38(a.1), as discussed above, any subsequent increase in value from the date of death to the date of disposition by the GRE will also be nil pursuant to subparagraph 38(a.1)(i).