Tax Tips and Traps for Charitable Gifting on Death · beneficiary designations of life insurance...

Tax Tips and Traps for Charitable Gifting on Death

Hayley Maschek, LLB

KPMG Law LLP / KPMG LLP

September 19, 2018

2© 2018 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative

(“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks o f KPMG International.

Agenda• Review of Current Rules

• Charitable Gifts

• Donation Tax Credit

• Estate Gifts

• Life Interest Trust Gifts

• Non-Cash Gifts

• Gifts of Capital Property

• Gifts of Registered Accounts, Life Insurance

• Charitable Remainder Trusts

• Questions?

Review of Current Rules



Lifetime Charitable Gifts• Donation receipt = FMV of donated property

• General limit = 75% of net income (except ecogifts, cultural property)

• Increased by 25% of recapture and capital gains realized by gift (i.e.,

full shelter)

• Unused donations – carryforward 5 year period



Donation Tax Credit For individuals:

Federal credit:

• 15% for first $200

• 29% for excess – if taxable income is < $205,843

• 33% for excess – if taxable income is >$205,843

• B.C. credit:

• 5.06% for first $200

• 16.8% for excess

* Also applies to Graduated Rate Estates & Qualified Disability Trusts



Donation Tax Credit

For all other trusts:

• Federal credit:

• 15% for first $200

• 33% for excess (taxable income is N/A)

• B.C. credit:

• 5.06% for first $200

• 16.8% for excess



Estate Gifts• As of January 1, 2016, donation receipt = FMV at time that gift is made

by executors

• Not FMV immediately before death

• Cash flow considerations – if gift not made at time of filing of terminal

tax return

• Interest exposure



Graduated Rate Estates (“GRE”)

GRE Conditions:

• An estate that arose on and as a consequence of death

• Not more than 36 months after death

• Must be a testamentary trust

• Must designate as a GRE

• No other estate can be designated as a GRE

Watch for transactions that can taint testamentary trust status:

• Contribution by persons other than the deceased

• “Offside” loans to the estate



Estate Gifts• If made by GRE (within 36 months) or former GRE (within 60 months)

can be claimed as follows:

• Former GRE – meets all GRE conditions except > 36 months

• Gifts > 60 months – year of gift and 5 year carryforward – 75%

GRE Former GRE

Deceased final T1 – 100% Deceased final T1 – 100%

Deceased PY T1 – 100% Deceased PY T1 – 100%

Year of gift – 75% Year of gift – 75%

PY’s of GRE – 75% PY’s of GRE – 75%

Not PY’s of former GRE

5 year carryforward – 75% 5 year carryforward – 75%



Former GRE Gifts• Example – September 19, 2018 DOD, August 31st fiscal year end, gift

made between January 1 and September 19, 2023

Year Donation Credit

2017 Calendar Year Yes – 100%

2018 Calendar Year Yes – 100%

August 31, 2019 Yes – 75%

August 31, 2020 Yes – 75%

August 31, 2021 Yes – 75%

September 19, 2021 (deemed year end) Yes – 75%

December 31, 2021 No

December 31, 2022 No

December 31, 2023 Yes – 75% (year of gift)

+ 5 year carryforward Yes – 75%



Estate Gifts

• Gifts made by GRE / former GRE must:

• Be deemed by s. 118.1(5.2) to have been made – e.g., named

beneficiary designations of life insurance policies, RRSP, RRIF or

TFSA’s

or

• Be property that was acquired by estate as a consequence of death

or substituted property. Watch:

• Proceeds of redeemed / repurchased shares would qualify

• Dividends on common shares would not



Gifts by Life Interest Trusts

• Life Interest Trusts include alter ego / joint partner / spousal trusts

• As of January 1, 2016, death of life interest beneficiary (i.e., settlor,

survivor of settlor/spouse, spouse) results in:

• Deemed year end

• Deemed disposition of assets at FMV

• Gains taxed at top marginal tax rate



Gifts by Life Interest Trusts

• Gifts made within 90 days of calendar year of death can be claimed in

deemed year end

• At 75% limit (not 100%)

• Property must be property held by trust at time of death or

substituted property

• Must be a gift not a distribution “qua beneficiary”

Gifts in Kind



Gifts in Kind• A gift of property other than cash

• e.g. real property, investments, life insurance, registered accounts

• Tax implications:

• Deemed disposition at FMV at date of death

• Deemed disposition at FMV at date of gift

• FMV increases / decreases on capital property

• Increase = fully sheltered capital gain

• Decrease realized in 1st year = carryback to terminal return

• Otherwise losses may be trapped in estate



Gifts in Kind• Publicly traded securities (“PTS”) – 0% capital gain inclusion rate

• Includes capital gains to date of death and capital gains to date of gift

• Shifts in value => not relevant

• Benefit of gifting shares vs. cash = up to 24.9% * accrued gain

• Provide executor with flexibility to gift PTS



Gifts in Kind

• Other types of property that are subject to 0% capital gain inclusion

rate:

• Ecologically sensitive land

• Other?



Gifts of Capital Property• Fully-sheltered by step up in credit limit

• Timing issue:

• Terminal return will often be filed before the gift is made and

will have to be subsequently amended

• Resulting cash flow issue

• Particularly problematic where estate has illiquid assets or there

is a desire not to dispose of assets to fund tax / interest

• Option: Election at cost?



Gifts of Capital Property: Election at Cost• Single individual – no heirs – 100% to charity

• Owns significant illiquid assets at date of death

• Concerned about potential interest exposure on taxes arising

from deemed disposition at date of death until time that gift is

made by GRE/former GRE



Gifts of Capital Property: Election at Cost• Consider electing under s. 118.1(6) to have charitable gift occur

at deceased’s tax cost

• No capital gain in terminal return – no interest exposure

• Pre GRE regime, elected amount = deemed proceeds and

amount of gift

• Post GRE regime, section appears to apply to allow election =

“GRE’s” tax cost (not deceased). Thus, capital gains/recapture

to date of death cannot be eliminated? Only gains thereafter?

• These provisions were not updated….thus, technical anomaly?



Gifts of Private Company Shares

• Gift may be deemed not to have been made if the shares = non-

qualifying security (NQS)

• Complex rules – discourage donations of NQS that are not monetized

by the charity within a reasonable timeframe

• If charity disposes of shares within 60 months of date of gift, the estate

should get the donation credit

• Does the post-mortem plan line up with the donation credits?

• Suggest running the numbers to confirm before proceeding



Gifts of Registered Accounts

• Gifts of Registered Accounts

• Charity as Named Beneficiary

• Via Estate

• Probate fee savings where charity is a named beneficiary

• Gift deemed to have been made by the estate for tax purposes

• Tax on terminal return based on FMV at date of death

• Donation credit to estate based on FMV at time of donation




• FMV of RRSP at DOD = $100,000

• FMV of RRSP at date of gift = $125,000

• Terminal return income inclusion = $100,000

• Estate donation credit based on FMV of $125,000

• Value increase ($25,000) subject to tax in beneficiary’s hands

• Beneficiary = charity so no resulting tax

• Result: increased donation credit available to offset other gains/income




• Example:

• Donor has RRIF that is to go to charity – no named beneficiary

• Donor established an alter ego trust (“AET”) to hold all other assets

• Deemed gains on the RRIF tax in donor’s terminal return. Full

donation credit available – once gift is made

• What if will is challenged? Who funds the taxes (or interest) in the

meantime? AET?

• Loss of GRE status (contribution / loan by other than the

deceased)?

• No ability to offset RRIF value with donation credit



Gifts of Insurance

• Gifts of Life Insurance Registered Accounts

• Charity as Named Beneficiary

• Via Estate

• Tax implications:

• No terminal return taxes associated with death benefit

• Gift deemed to have been made by the estate for tax purposes

• Probate fee savings where charity is a named beneficiary



Gifts of Insurance• Charity as Named Beneficiary

• All other assets held in AET

• Result:

• No tax on the terminal return

• Donation credit in the estate that will not be utilized

• Consider AET as named beneficiary or transferring policy to AET

• No current tax implications

• AET then makes the gift (within 90 days of calendar year of death) and

uses the donation credit to offset gains in deemed year end



Charitable Remainder Trusts

– Archived IT-226R – Gift of Residual Interest in Real Property or

Equitable Interest in a Trust, dated Nov 29, 1991

– Transfer of property to trust (inter vivos or testamentary)

– Income to beneficiary during their lifetime

– Capital to charity upon income beneficiary’s death

– No ability to encroach upon capital

– CRA’s view – charitable donation = FMV of capital interest gifted to

charity

– Taking into account nature of property, life expectancy, interest rates,

etc.




– Testamentary CRT’s:

– Pre GRE regime: Gift deemed made by the deceased immediately

prior to death

– Post GRE regime: Gift of capital interest made by GRE

– Technical Interpretation 2016-0625841E5, dated April 19, 2017

– CRA view – Capital interest “not acquired by GRE at the time of

death”, thus s. 118.1(5.1) N/A

– Only claimed by GRE in the year of gift and 5 year carryforward




– S. 118.1(5.1) allows for “substituted property”

– Property owned by deceased consists of a “life interest” and a

“remainder interest”

– Property transferred to CRT by GRE in return for a “life interest” and

“remainder interest” in the CRT

– GRE gifts “remainder interest” to charity

– Is remainder interest in CRT “substituted property” for remainder

interest in property?

– If yes and property transferred to CRT / gift of capital interest made

within allowable period – should qualify as a GRE/former GRE gift??

– Substituted property question not asked / addressed by CRA

– Additional TI has been submitted



Consider Gifts During Lifetime• What is the client’s asset profile?

• Do they have significant donative intent?

• Are they paying current taxes (whether personally or through their

privately owned corporation)?

• Consider gifting during lifetime

• Reduction in current taxes

• Benefits of seeing gifts in action today

Questions?



KPMG Contact

Associate, KPMG Law LLP

[email protected]

604.646-6319

Hayley Maschek

Thank you

kpmg.ca

© 2018 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of

independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss

entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG

International.

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thorough examination of the particular situation.

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Tax Tips and Traps for Charitable Gifting on Death · beneficiary designations of life insurance...

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Transcript of Tax Tips and Traps for Charitable Gifting on Death · beneficiary designations of life insurance...