Recent 2016 legislative proposals (described in greater detail in our previous article) fix a timing problem that could have arisen in respect of charitable
donations made by the trustees of alter-ego trusts, joint spousal trusts and
testamentary spousal trusts (“Life
Interest Trusts”).
As described in our previous article, the assets of those
trusts are subject to a deemed disposition on the death of the initial
beneficiary or beneficiaries (the person who established the trust in the case
of an alter-ego trust or the surviving spouse in the case of a joint or
testamentary spousal trust). I will call
this individual the “Relevant
Beneficiary”. If the trust document
authorizes the trustee to make charitable donations, the trustees can use the
donation tax credit in order to reduce the tax payable as a result of that
deemed disposition.
The 2015 changes introduced a deemed taxation year-end at
the end of the day on which the Relevant Beneficiary died. This deemed year-end created a problem. In order for the trust to use the donation
tax credit against capital gains triggered by the deemed disposition, any
charitable donation had to be made before the end of the day of death. Even if death occurred first thing in the morning, this would not give the trustee much time to make the donation.
The 2016 proposals alleviate this timing problem by
providing the trustee with 90
days from the end of the year of death to make the donation. If the Relevant
Beneficiary dies on the last day of a calendar year, the trustee has 90 days in
which to make the donation. If the beneficiary dies earlier in a calendar year, the trustee has additional time because
the trustee has the rest of the calendar year in question plus the 90 days
after the end of the calendar year.
As long as the trustee makes the donation within 90 days of
the end of the calendar year in which the death occurs, the trustee can decide
how to use the donation tax credit from among several options. The trustee can use the credit in the taxation
year in which the gift is made, in any of the following five taxation years or in
the trust taxation year that is deemed to end on the
death of the Relevant Beneficiary (the most likely choice). By choosing this last option, the trustee can
use the donation tax credit to reduce tax triggered by Relevant Beneficiary’s
death.
The legislation does not address a second timing issue that
arises in respect of donations made by a Life Interest Trust: the time of the donation itself. In order for the trust to use the donation
credit at all, the donation must be made by the trustee pursuant to a power to make donations. If the trust deed requires that the trustee pay money to a charity on the death of
the individual, the trustee is legally obliged to transfer funds to the charity
and is not making a gift. In this case,
the gift would have been made at the time that the trust was first
established. But if the gift depends on a
future date of death and on the amount of property left in the trust at the
time of that future death, it is impossible to quantify the amount of the gift at
the time that the trust is established and no donation tax credit can be given
at that earlier time.
So the 2016 proposal addresses one timing issue but not the
other. In order for the trust to be able
to use the donation tax credit against tax triggered by the deemed disposition,
the trustee has to make the donation pursuant to a power to make donations and
has to do so within 90 days of the end of the calendar year in which the death
occurs. Usually, the trustee will honor
the expressed wishes of the deceased individual when exercising this power but has
no legal obligation to do so. The
trustee will follow the expressed wishes purely as a matter of honor – the
trustee cannot be legally obliged to
make the donation.
The Department of Finance is aware of this remaining
anomaly. I hope that a future amendment
will fix this issue so that generous Canadians have some legal assurance that
their charitable wishes will be legally enforceable if they choose to leave
assets to charity through a Life Interest Trust.
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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.