CRA finds that an estate gift of sales proceeds of s. 70(5) property can be carried back to the terminal return – and s. 38(a.1)(ii) zeroes post-death appreciation on estate-donated shares

S. 118.1(5.1)(b) applies to most gifts made by a graduated rate estate of property that was acquired by it on and as a consequence of the deceased’s death “or is property that was substituted for that property.” CRA indicated that this substituted property concept applied where the deceased held appreciated mutual fund units whose cost was stepped up on the death under s. 70(5) and with the executors then determining to sell some of the units and gift the cash proceeds to a registered charity. The significance of this was that the donation credit could be claimed under s. (c)(i)(C) of the definition of “total charitable gifts” in s. 118.1(1) in the deceased’s terminal return, thereby helping to offset some of the tax on the s. 70(5) gain.

There also is a look-back under s. 118.1(5.1) for purposes of s. 38(a.1)(ii), so that if the executors instead donated the MFT units in kind, the terminal return would then be amended to eliminate the s. 70(5) gain on the MFT units and have the gain treated as nil. Furthermore, this would be the case even if the MFT units had substantially appreciated between death and their donation by the executors.

Neal Armstrong. Summaries of 24 July 2017 External T.I. 2017-0698191E5 under s. 118.1(5.1)(b) and s. 118.1(1) - “total charitable gifts”- s. (c)(i)(C).