TRAPS TIPS The Income Tax Act (the...

TRAPS TIPS

The Income Tax Act (the Act) can be a minefield for the unwary. However, the wording of Subsection 1181(5) appears to be straightforward; it allows a gift made by the agency of a deceased individual, pursuant to their will, to be look uponed to have been made during the individual's year of death. This provision of the Act can be particularly helpful when there is a significant tax liability arising in the individual's final taxation year. It's also helpful because, in the year of death, donations may be claimed up to 100% of the individual's taxable income, and unused donations may be carried back to the taxation year prior to the year of death. (In the absence of this provision, the donation tax credit associated with the gift would be available for use in the income tax revert of the individual's estate.)

However, technical interpretations issued according to the Canada Customs and income Agency (CCRA) have made this area of taxation far from certain. These interpretations focused primarily upon the ability of an executor of an individual's estate to exercise discretion with have a high opinion of to a gift made pursuant to a will, and the impact this ability had forward the application of Subsection 1181(5) In particular, the interpretations described three situations in which the regularitys found in Subsection 118.1(5) would not apply, equal though a gift had been made pursuant to the times of a will. They are as follows:

i. the magnitude of the gift made pursuant to the will is left to the executor's discretion;

ii. the charity that will receive the gift is left to the executor's discretion; or,

iii. the share of the gift to be received by dint of each of several identified charities is left to the executor's discretion.

Commentators forward the rules of Subsection 1181(5) drew the following conclusion from these interpretations: If, at the time of the exact amount of the gift and the actual recipient of the gift could not be ascertained, then the empires in Subsection 118.1(5) would not apply.

The fact that individuals are ofttimes uncertain about how much cash they'll ne for retirement, what capitals will therefore remain available for donation, and what charities are worthy of their posthumous support creates a dilemma for estate planners. In the past, in order to comply with CCRA's established position, the individual's will could provide for fixed amount donations to certain specified charities and could stipulate that the will be reviewed forward a regular basis. Alternatively, the gift amount could be based upon a formula that took into account the cash available for donation at the time of death, or other variables in the same state [i]or[/i] condition as age, interest rates etc Neither alternative would necessarily qualified all of the wishes of the individual, further if the planner did not make use of one of these alternatives, there was little certainty as to the application of Subsection 1181(5)

CCRA previously stated that they were reviewing their position onward the application of Subsection 1181(5) According to a ruling issued forward March 8, 2001, CCRA be seens to have completed their review and blunted their position. Their new policy allows an individual to give the executor one flexibility while still falling within the provisions of Subsection 1181(5) In this ruling, CCRA acknowledges that where a will stipulates that a specific amount is to be gifted to a dispose of charities and provides a list of the specific charities to which as it was donations can be made, then the donations qualify as gifts made by means of will, even if the executor has discretion to determine the amount to be donated to each charity. The ruling's alone stipulations are that the actions taken through the executor must be "reasonable" and in accordance with the expressions of the will.

This change in position from CCRA significantly increases the flexibility that an estate planner can incorporate into a will with notice to an individual's desired bequests. Given that there is no mention in the ruling regarding the number of charities that can be listed or the minimum amount that ne be donated to each listed charity, it would appear that Subsection 1181(5) applies as in extent as the donation amount pursuant to the will "in aggregate" is specified. on the same level the aggregate amount to be gifted among the listed charities could in theory, be a specified percentage of the assets of the estate to add further flexibility to the amount given to charity pursuant to the will.

Based onward this ruling, when preparing estate plans for individuals who wish to leave a portion of their assets to charity, consideration should be given to granting the executor the discretion to allocate bequests among a.group of specified charities. This would be particularly useful in cases where flexibility is identified as a primary issue for the client in developing a gifting strategy.

Also, where a will has been prepared in the past, with the bequesting provisions of the will based upon CCRA's earlier more narrow interpretation, consideration should be given to reviewing the will in light of the recently made known policy. Where applicable, the will may be amended to provide flexibility while still conforming to the novel policy, to ensure that the donation tax credit is deductible in the year of death pursuant to Subsection 1181(5) of the Act.