Tax Tip[] Donations

Making Maximum Use of Charitable Donations on Death

“build flexibility into the deceased’s Will.”

People often make their most major donations in their Wills. When you factor in the expanded amount of medical expenses that can be claimed on the terminal tax return, losses that may be carried back from the estate and other extra deductions available in the year of death there is potential to waste some or all of the donations. Without careful planning the donation tax credit available can be higher than tax liability in the year of death.

Often an Estate may take several years to administer and distribute. Over this time a significant tax liability can result in the Estate from income generated subsequent to death. It would be beneficial to have the excess donation credits from the year of death available to the Estate.

One solution to the problem is to build flexibility into the deceased’s Will to allow the Executors to fund the desired donation through a combination of an actual donation to be used on the terminal return and an allocation of estate income to the charities. If the will is worded carefully, the donation portion can create a tax credit on the terminal return and the allocated income can generate a tax deduction to the estate.

Assume a person would like to make a $3 million donation in his Will. With proper drafting, the will could provide the power to Executors to pay donations either at death (claim the donations on the Terminal return), pay the donation from the income of the Estate, or a combination of both. This approach would allow Executors to maximize the use of the charitable donations. The collective tax paid by the deceased and the Estate would be reduced so the funds available to residual beneficiaries would increase.

Without this planning, some or all of the credit from the $3 million donation could go to waste.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Proposed Charitable Donation Rules (#2)

“Advantages Received by the Donor.”

Further to the recent Tax Tip (04-01), this tax tip on the proposal rules on donations will discuss what happens to advantages received by the donor. If there is no fair market value grind because of the rules dealing with holding the shares for less than three years or the reasonable expectation of making a gift test, there still may be a reduction to the fair market value of the donation if an “advantage” is received by the donor. The “amount of the advantage” of the gift is defined in the proposed rules. The amount of the advantage in respect of a gift is:

  1. the value, at the time the gift is made, of any property, service, compensation or other benefit which the donor or other non-arm’s length person has received, obtained or enjoyed, or is entitled, either immediately or in the future and either absolutely or contingently, to receive, obtain or enjoy;
  2. that is consideration for the gift;
  3. that is in gratitude for the gift;
  4. that is in any other way related to the gift; and
  5. the limited recourse debt in respect of the gift.

This rule applies regardless of whether the property was acquired under a gifting arrangement. There are three general criteria in order for there to be an advantage in respect of making a gift. The first criteria is that there must be a property or service that the donor or non-arm’s length persons have received or are entitled to receive. The second criteria is that the property or service must be received or entitled to be received as consideration or in gratitude for the gift, or be in “any other way related to the gift”. The third criteria is that there must be limited recourse debt.

Limited recourse debt is defined to be the unpaid principle amount of any indebtedness for which recourse is limited, either immediately or in the future and either absolutely or contingently. This debt usually refers to a secured loan where the only recourse to the lender is in repossessing the property that is collateral for the loan.

If a car was donated with a loan on it, then the donation receipt would be reduced by any loan on that car.

On top of all of these rules, there is an anti-avoidance rule which states that if there is a series of transactions that are meant to increase the cost to a donor of the property, then the fair market value will be deemed to be the lowest cost of the taxpayer to acquire that property or an identical property at any time.

In general, the Department of Finance has taken a sledgehammer in order to kill an ant. If the Department of Finance would have stated that any asset has to be held for one year, then it would have likely limited the tax shelters that they are trying to fight. Instead, they have effected many more transactions than they were trying to catch.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Proposed Charitable Donation Rules (#1)

“Government has limited access to donation receipts..”

On Friday December 5, 2003 (“the announcement date”), the Department of Finance proposed further changes with the respect to charitable donation tax shelter arrangements. In the introduction to these proposed changes, Finance discussed the buy-low donate-high tax shelters that they were trying to close down. The rules, however, go much further than that.

What Finance has tried to do is essentially provide a “fair market value grind” to reduce the amount of the donation receipt for transactions they find offensive. They have proposed that if a donor has acquired a property under a “gifting arrangement” the FMV of the property that is the subject of a gift is deemed to be the lesser of (1) the fair market value otherwise determined, and (2) the donor’s cost of the property.

The effect of this provision is to put an end to the “buy-low, donate-high” arrangement because the donation will be based on the donor’s cost and not on the property’s fair market value.

If the property was acquired under a gifting arrangement, it is irrelevant when the property that is the subject of the gift was acquired. However, the government has gone further than that. If the property was not acquired under a gifting arrangement then the proposed rules deem the fair market value to be the donor’s cost:

  1. unless the donor acquired the property three years or more before the gift is made;
  2. if it is reasonable to conclude that, at the time the donor acquired property, the donor expected to make a gift of the property.

This means that even if the three-year test is met, the fair market value will be deemed to be the donor’s cost if it is reasonable to conclude that, at the time the property was acquired, the donor expected to make a gift of property. The burden is on the donor to show that there is no such expectation.

The fair market value grind does not apply to gifts of inventory, publicly traded securities, certified cultural property, ecological gifts, or real property situated in Canada. As well, the three-year test and reasonable expectation of making a gift test do not apply if the gift is made as a consequence of the donor’s death.

The one type of asset not mentioned above is the donation of private company shares. Therefore, if a shareholder did an estate freeze and took back preferred shares and donated those preferred shares within the three years, then the donation would have to be at cost and not fair market value. Even if the three-year test is met, the taxpayer could fail the reasonable expectation of making a gift test since the freeze may have been done with the intention of giving the shares to a charity.

The other rules, with regard to advantages received by the donor, will be dealt with in a subsequent tax tip.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.