Over a year ago then Finance Minister Jim Flaherty announced that there would be major changes in the way Canadians would be taxed at death. The new system created what was called a Graduated Rate Estate (a “GRE”) which, amongst other things, entitles the estate of a taxpayer to the graduated rates of tax which are applied to living taxpayers. After 36 months the estate, if not wound up by then, would be taxed at the highest marginal rates.
Since the budget, tax advisors have been combing through the new rules and trying to advise clients on the implications these new rules will have to them. One such implication has been the intended changes to the way that charitable donation tax credits may be applied as a result of gifts by will. If a Canadian makes a gift by will the resulting tax credits could be used in either the deceased’s tax return or the preceding year or within the estate. However, this new system created a (we assume unintended) consequence relating to gifts of non-qualifying securities via an estate to an appellate foundation.
Non-Qualifying Securities (NQS) are effectively securities of private corporations. In general, the Income Tax Act (ITA) is concerned that the gifts of such securities by owners of such corporations to charities controlled by those people could result in different types of misuse. One can easily imagine a situation where the donor donates shares of a corporation with no voting rights attached and no dividend payments to a private foundation the donor controls. In this event the donor could end up with a tax receipt and the charity with nothing meaningful. As a result, there are numerous anti-avoidance provisions within the act designed to allow for the donation of NQS only where the charity will be able to realize value from the donation or where the parties are acting at arm’s length. One of the exceptions to the anti-avoidance rule involves a situation where the donation is made to a public foundation. A public foundation is by definition not controlled by any single individual and so the ITA assumes that any donations to such a foundation are thoroughly vetted and would only be made if a charity believes value can be realized from such a transaction.
The ITA states explicitly that a gift made by will is made by the deceased estate. An estate is a “trust” and generally is both a testamentary trust and a personal trust for tax purposes. The ITA also states that a personal trust is generally deemed not to be at arm’s length to any person that is beneficiary to the trust. Therefore, as a beneficiary of the deceased estate, a public foundation is beneficially interested in the deceased estate and will be deemed not authorized to deal at arm’s length with the estate. Since the public foundation and the estate are deemed not to deal with one another at arm’s length the gift falls out of the exceptions outlined in the ”excepted gifts”.
In simpler terms if an individual leaves shares of a private corporation to a public foundation in his or her will no receipt can be issued until the shares either cease to be NQS or the shares are sold to some third party thus allowing the charity to issue a receipt. The CRA in the recent 2015 Society of Trust and Practitioners (STEP) Conference confirmed that this is indeed the CRA’s understanding of the provision as well.
This change in the status quo means that there will be need for workarounds to be developed by professional advisors. Drache Aptowitzer LLP lawyers have experience with this and have been working to develop a number of strategies which may be useful to Canadians caught by this new circumstance and we would be pleased to consult with you on it.
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