Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Various scenarios presented whereby executors donate estate assets to a Canadian charitable organization.
Position: Tax consequences confirmed.
Reasons: New legislation dealing with donations made by graduated rate estates.
XXXXXXXXXX 2017-069819
L. Holloway
July 24, 2017
Dear XXXXXXXXXX:
Re: Determination of Tax Treatment on Gift of Securities by Executors of Will
We are writing in response to your email correspondence of April 10, 2017 regarding the income tax implications of different scenarios involving gifts made by executors of the estate of a deceased individual. All legislative references herein are to the Income Tax Act (the "Act") unless otherwise stated.
This technical interpretation provides general comments about the provisions of the Act. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
Your letter describes a basic scenario whereby a taxpayer (the “deceased”) died in 2016. His Will named his three sons as equal beneficiaries and co-executors, with no designation of amounts to be given to charitable organizations but giving the co-executors the flexibility to make donations if they wish. His assets at the time of death included a mutual fund investment account with an inherent gain of $1 million on assets with a total fair market value (“FMV”) of $4 million. As a general rule, the capital gain on the mutual fund account would be included on the final return of the deceased pursuant to subsection 70(5) of the Act and the adjusted cost base (“ACB”) of the mutual funds would then become $4 million for the estate in regards to any future dispositions or distributions to the beneficiaries.
The three variations of the basic scenario with your questions and our respective comments follow.
Scenario 1.
The first scenario presented is one in which the co-executors decide to make a donation of $500,000 to a registered Canadian charity from the estate (which is the only trust created on death and has been designated a Graduated Rate Estate (“GRE”) in 2017. The $500,000 donation was cash that came from the sale by the estate of units of the mutual fund account. You asked if that donation would be available to offset personal taxes owing on the final return. It is your opinion that subsection 118.1(5.1) would deem the cash received to be substituted property from the mutual funds that were acquired by the estate as a consequence of death. You also noted that where subsection 118.1(5.1) applies to the donation, the donation can be claimed on the final return of the deceased pursuant to clause (c)(i)(C) of the definition of “total charitable gifts” in subsection 118.1(1) and the donation credit would be available against the tax on the capital gain from the deemed disposition under subsection 70(5).
Our Comments:
Starting in 2016, pursuant to subsections 118.1(4.1) and (5) a gift made by the estate will be deemed to be made by the deceased’s estate (and not by the deceased) at the time the gift is transferred to the donee, subject to subsection 118.1(13). Pursuant to paragraph (c) of the definition of “total charitable gifts” in subsection 118.1(1), where a gift is made or deemed to have been made by a GRE, the estate will have the flexibility to allocate the donation to any of: (a) the last two taxation years of the deceased individual; (b) the year of the donation or any of the five following years of the estate; or (c) any preceding year of the estate.
We agree that, pursuant to subsection 248(5), the cash would be property substituted for the property that was acquired by the estate on and as a consequence of the death of the deceased (the mutual fund units acquired by the estate upon the death of the deceased that were subsequently sold and cash realized). Therefore, as subsection 118.1(5.1) would apply to the donation the donation credit can be claimed on the final return of the deceased pursuant to clause (c)(i)(C) of the definition of “total charitable gifts” in subsection 118.1(1).
Scenario 2.
In this scenario, the facts are the same as above, except that in this case the co-executors donate $500,000 of mutual fund units in-kind to the registered Canadian charity. You asked if the capital gain on the mutual fund units donated, that had previously been reported on the final return of the deceased in 2016 and taxed at the 50% inclusion rate, would have the capital gain inclusion rate reduced to 0%. It is your opinion that subparagraph 38(a.1)(ii) would apply to the disposition of the mutual fund units donated to the charity and the inclusion rate on the capital gain would be reduced to 0%. As the gain had previously been reported at the 50% inclusion rate, the 2016 final return would have to be amended to recalculate the taxable gain. Finally it is your opinion that the availability of the donation credit on the final return would not change and that the gain on the mutual fund units that were donated, and that would be subject to the 0% inclusion rate on the final return, would be determined by the specific ACB and FMV of those units at the time of death.
Our Comments:
If subsection 118.1(5) applies to a gift, it will not be considered to be made until the time that the property that is the subject of the gift is transferred. Also, under subparagraph 38(a.1)(i) the taxable capital gain is deemed to be nil where capital property disposed of, to a qualified donee, is a share, debt obligation or right listed on a designated stock exchange, a share of a mutual fund corporation, a unit of a mutual fund trust, or an interest in a related segregated fund trust.
Subparagraph 38(a.1)(ii) provides for a nil taxable capital gain if a disposition is deemed by section 70 to have occurred and the property is:
- a security described in subparagraph 38(a.1)(i), and
- the subject of a gift to which subsection 118.1(5.1) applies and that is made by the individual's GRE to a qualified donee.
We agree with the conclusion above. The gain on the mutual fund units would be calculated at the time of death, however the inclusion rate would be recalculated to be zero as per subparagraph 38(a.1)(ii).
Scenario 3.
The facts are the same as in Scenario 2 above for the donation in-kind. At the time of the donation, the estate would report the disposition of the mutual fund units at their FMV at the time they were transferred to the charity. You had asked if a capital gain resulting from an increase in the value of the mutual fund units over the ACB of the units received from the taxpayer as a consequence of his death would also be eligible for the 0% capital gain inclusion rate. It is your opinion that subparagraph 38(a.1)(i) would apply to this scenario where there was a donation of eligible securities made to an eligible donee.
Our Comments:
Where the estate of an individual donates property that was the subject of a deemed disposition by the individual immediately before the individual's death, and the property's FMV upon transfer to the qualified donee has changed, the difference will result in a gain or loss to the estate that will generally be recognized for income tax purposes.
However, as noted above, subparagraph 38(a.1)(i) provides that a taxable capital gain from the gift of certain properties, including units of a mutual fund trust, is nil where the gift is to a qualified donee.
Accordingly, the taxable capital gain in respect of any subsequent increase in value of the mutual fund units from the date of death to the date of disposition by the GRE to the qualified donee will also be equal to zero pursuant to subparagraph 38(a.1)(i).
We trust our comments will be of assistance.
Yours truly,
Phil Kohnen, CPA, CMA, TEP
Manager, Trust Section I
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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