Budget gives executors wiggle room

Budget 2014 has made it easier to get the maximum benefit from donations made by will.

Under current rules, these donations are deemed to have been made immediately before death, notes Kelly Kolke, a partner at Grant Thornton in Truro, N.S.

That means the Charitable Donations Tax Credit (CDTC) has to be applied to the person’s terminal return, says Mike Power, a partner at KPMG in Halifax.

This can mean using less than the full CDTC. For instance, if the taxpayer has minimal income in the year of death, there won’t be enough tax owing to get the full break. “It’s wasted,” notes Dave Walsh, a partner at EY in Ottawa.

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The budget addresses this problem by giving executors flexibility in applying the CDTC.

First, under the new system, the donation’s no longer deemed to be made by the deceased just prior to death, notes Jason Safar, a partner at PwC. Instead, CRA views it as made by the estate when the donated property is transferred to the qualified charity. But that transfer has to happen within 36 months of death.

Second, the CDTC doesn’t have to be applied to the deceased’s terminal return. Instead, the budget proposes a five-year window to apply the credit. “If you make the donation in the third year of the estate, you could allocate [the credit] to that tax year, the previous two tax years of the estate, the terminal year, or the year prior to that,” says Kolke.

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It doesn’t seem the whole credit has to be applied to one year. “The trustees can allocate, say, $10,000 to the terminal return, $5,000 to the prior year, and the remainder to the year the donation is made,” Kolke adds.

Walsh notes that if it’s better to apply the credit to the year prior to the terminal return, “the executor would file an amended tax return, claim the credit and receive a refund, which would become property of the estate.”

Safar gives an example. “Say you have a large asset and dispose of it. The next year you die, there’s a donation in your will, and in that year there isn’t a lot of income. Now [the executor] can go back to the prior year when you did have a lot of income and apply [the CDTC] against that.”

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And just because the new rule offers more flexibility, it doesn’t mean trustees have to use it. “Claiming it in the year of death,” says Walsh, “may still be the best thing to do.”

Power says the proposal could make people more likely to make donations.

But there are two potential downsides to the proposal, notes Kolke. The value of the donation is determined at the time of transfer. So if it’s stock and the price dips between the time of death and time of transfer, the charity gets less and the tax benefit’s reduced.

Second, people who might otherwise not have to file an estate return will have to. Under the new system, says Kolke, executors of small estates may have to file estate returns to cover off the donation only.

But these are minor issues that don’t detract from the proposal’s overwhelmingly positive reception.

“It’s good news,” says Safar.