The Annotated Will 2017: GRE and Charitable Donation Rules

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1 The Annotated Will 2017: GRE and Charitable Donation Rules Darren G. Lund Benefits and Implications of GRE Status Graduated rate taxation for income retained in estate Ability to choose off-calendar year-end Exempt from tax installments Exempt from alternative minimum tax Access to 164(6) and 112(3.2) tax planning Access to flexible charitable donation credit (deaths after 2015) Nil capital gains inclusion for charitable gifts of publicly-traded securities (deaths after 2015) 1

2 Requirements for GRE Status (s. 248(1) ITA) Estate that arose on and as a consequence of individual s death Estate qualifies as a testamentary trust under s. 108(1) ITA All contributions must be as a consequence of the individual s death Individual s Social Insurance Number provided on the estate s income tax return Estate designates itself as the GRE on its income tax return No other estate designates itself as the individual s GRE Relevant time is no later than 36 months from the date of the individual s death Questions Raised by Definition of GRE Can a separate testamentary trust established under a will be designated as the GRE? Since no other estate can designate itself as the GRE, does that mean only one estate be the GRE where there are multiple wills? 2

3 CRA Position An individual can have only one estate, which is comprised of all of the individual s property prior to such property being distributed pursuant to a will or rules of intestacy Testamentary trust established under will cannot be the GRE (it is a trust but not an estate) Assets used to fund a testamentary trust no longer part of GRE Where there are multiple wills, there is still only one estate See CRA Views C6, C6 Drafting for the GRE: Delayed Distribution Unclear how CRA will apply the 36-month period for the GRE Will every estate be given up to 36 months in which the estate can be maintained as a GRE? Will executors be expected to fund testamentary trusts, pay legacies, and/or make outright distributions once they are otherwise in a position to do so, absent a contrary indication in the will? 3

4 Drafting for the GRE: Delayed Distribution Consider providing express authority in the will for the executors to maintain the estate as the GRE for up to 36 months Discretionary Maximum duration one day prior to 3-year anniversary Deal with income arising during the GRE period If discretionary limit the liability of the executors Drafting for the GRE: Delayed Distribution (p. 1-63) Notwithstanding any other provision in this Will or any common law rule regarding the ordinary time for administration and distribution of an estate, my Trustees shall have the power and authority to maintain my estate as a graduated rate estate, within the meaning of the Income Tax Act (Canada), until such date (the distribution date ), prior to the third (3rd) anniversary of my death, as my Trustees may determine, and to defer the transfer or payment of any gifts set out in my Will, or the establishment of any trust created by my Will, until the distribution date. During the period between the date of my death and the distribution date, my Trustees may accumulate the net income derived from my estate and add it to the capital thereof, or may from time to time distribute all or any part of the net income to the person or persons who would be entitled to it if the distribution date occurred on the date of such distribution. My Trustees shall not be liable to any beneficiary of my estate or of any trusts created herein for any interest, cost or loss whatsoever for deferral of the distribution of my estate or payment pursuant to the terms of this my Will for a period of up to 36 months after the date of my death. 4

5 Drafting for the GRE: Direction to Trustees GRE concept is new Requirements may change over time Executors may not be familiar with GRE and not all executors will obtain advice Include provision authorizing Trustees to take all steps required to maintain GRE status Refer to required designation Authorize executors to obtain professional advice Multiple wills = no competing designations Drafting for the GRE: Direction to Trustees (p. 1-64) For single will: I direct my Trustees to take such steps as are necessary, and to manage the assets of my estate in a manner designed, to achieve the result that my estate will be a graduated rate estate as that term is defined in the Income Tax Act (Canada). My Trustees are authorized to use the assets of my estate to retain tax advisors to provide advice and direction for this purpose. My Trustees are authorized, in their discretion, to make any designation, election, allocation, or distribution they determine is necessary to maintain my estate as a graduated rate estate for a period of up to 36 months after my death. 5

6 Drafting for the GRE: Direction to Trustees (p ) For multiple wills: I direct my Trustees to consult with the executors under my Private Assets Will [or General Will, as applicable] to take such steps as are necessary, and to manage the assets of my estate in a manner designed, to achieve the result that my entire estate, defined as both my Private Assets and my Public Assets, will be a graduated rate estate as that term is defined in the Income Tax Act (Canada). My Trustees are authorized to use the assets of my estate to retain tax advisors to provide advice and direction for this purpose. My Trustees are authorized, in their discretion, and to make any designation, election, allocation, or distribution as they determine is necessary to maintain my estate as a graduated rate estate for a period of up to 36 months after my death. Drafting for the GRE: Delayed Payment of Legacies Delayed payment of legacies Interest generally payable on legacies that are not paid during the executor s year If Trustees are given the discretion to pay legacies at any time during the GRE period (i.e. delay payment), discuss with client whether interest should be paid or exempted If not interest payable, expressly exempt it (see, for example, charitable gift on p. 1-49) 6

7 New Charitable Donation Tax Credit Rules Draft legislation introduced on August 29, 2014 changed the rules for testamentary charitable gifts Changes linked to the new GRE concept Rules have undergone several changes, the most recent being introduced on October 19, 2016 New Charitable Donation Tax Credit Rules Gift is deemed to be made by the estate at the time the property is actually transferred to the charity Value of donation is value of gift at the time the property is transferred to the charity Gifted property must be property owned by the individual on the date of death or substituted property 7

8 Applying the Donation Tax Credit If the charitable gift is made by the estate in the 36-month period it is a GRE: Year of death and prior year (100% of income) Year of GRE gift is made or any prior year of the GRE (75% of income) Any of the 5 years following the year the gift is made (75% of income) Applying the Donation Tax Credit If the charitable gift is made by the estate in the 2-year period following the GRE period (months 37-60): Year of death and prior year (100% of income) Year of estate gift is made or any prior year of the estate in which it was a GRE (75% of income) Any of the 5 years following the year the gift is made (75% of income) Estate must otherwise still qualify as GRE 8

9 Testamentary Spousal Trusts If the charitable gift is made by a testamentary spousal trust (after spouse s death): Deemed year-end of trust on death of spouse Gift must be made within 90 days of end of calendar year in which deemed yearend occurs Spouse dies May 31, 2016, gift must be made in first 90 days of 2017 Credit can be applied to short tax year (deemed year-end), year gift is made, or any of 5 years following the year the gift is made (75% of income) Must be power to make gift Drafting for the New Flexible Credit: Delayed Gift In most cases, tax credit is most beneficial in the year of death to offset deemed disposition, but: May be excess credits Difficult to know in advance what the optimal use of the donation tax credits will be Consider giving Trustees discretion to satisfy charitable gifts at any time up to 60 months from the date of death 9

10 Drafting for the New Flexible Credit: Delayed Gift (p. 1-49) My Trustees shall pay to THE KIDS CHARITY (BN RR0001) the sum of Ten Thousand Dollars ($10,000.00) at any time within 60 months following the date of my death as my Trustees in the exercise of an absolute discretion determine, without interest. The receipt of the treasurer or other proper officer of this organization shall be a sufficient discharge to my Trustees. Drafting Implications of the New Charitable Donation Rules Charitable legacies may be preferable to gifts of residue Delays in administration (e.g. litigation) or obtaining clearance certificate, or illiquid assets, may put tax credit in jeopardy if gift cannot be satisfied within 60 months Plan for sufficient liquidity so that gift can be satisfied within 60 months 10

11 Darren G. Lund dlund@fasken.com 21 Disclaimer This handout is provided as an information service by Fasken Martineau DuMoulin LLP. It is current only as of the date of the presentation and does not reflect subsequent changes in the law. This handout is distributed with the understanding that it does not constitute legal advice or establish a solicitor/client relationship by way of any information contained herein. The contents are intended for general information purposes only and under no circumstances can be relied upon for legal decision-making. Readers are advised to consult with a qualified lawyer and obtain a written opinion concerning the specifics of their particular situation Fasken Martineau DuMoulin LLP 22 11

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