The charitable donation credit is one of the more generous credits under the Income Tax Act.
People often provide for charitable donations under their will. Sometimes the provision is explicit, and sometimes they give the executor or liquidator (trustee of their estate) discretion in terms of making charitable donations.
When claiming the charitable donation credit, there are a few significant tax rules that come into play when your estate makes the donation.
First, when a charitable donation is made under an individual’s will or otherwise by their estate, it is deemed to be a donation made (and valued) at the time it is given to the charity (rather than on the date of death). A similar rule applies where the donation to charity is made because of a designation under the individual’s life insurance policy, RRSP, RRIF, or TFSA.
Despite this deeming rule, if the donation is made by the estate within 60 months after the death, the credit can optionally be claimed by the deceased for the year of death or the immediately preceding year. (Technically, the estate must otherwise qualify as a “graduated rate estate”, which is normally the case, but there are certain conditions that must be met.)
Alternatively, the estate can claim the credit in the year the donation is made. If it is made within 36 months after the death, the estate can claim the credit in a previous taxation year of the estate. (Again, the estate must qualify as a “graduated rate estate”.)
As another alternative, the estate can carry forward the credit for up to 5 years and claim it in any one of those years (up to 10 years if the donation qualifies as an “ecological gift”). Obviously, the estate would still have to be in existence in those future years. If the estate is wound up relatively soon after the death, the carry-forward will be of limited use.
Donations made by the estate can be split up under the above rules, so, for example, part of the credit could be claimed by the deceased and part by the estate. The decision on where to claim the credit will depend on the facts, and in particular the tax otherwise payable by the deceased and the estate in the relevant year.
Another issue relevant to the deceased is the increase in the amount of donations that can qualify for the credit. Normally, most donations up to 75% of an individual’s net income for the year qualify for the credit in that year. In the year of death and the preceding year, the limit is increased to 100% of the individual’s net income for the year. But in any case, the credit should be claimed in any given year only to the extent of tax otherwise payable, because the credit is not a refundable credit.
Josh died in December 2020. His income in 2020 was $150,000. His estate makes $200,000 of cash donations to various charities in 2022.
His executor could choose to use up to $150,000 of the donations as a credit for Josh in 2020. However, as noted above, it would make sense to use the credit only to the extent of Josh’s tax otherwise payable in 2020. If the donation would generate a 50% credit (the exact rate will depend on Josh’s province of residence, among other things), and his 2020 tax will only be $45,000, then it won’t make sense to claim more than $90,000 of the donation of his 2020 return.
The remainder of the credit can be claimed by the estate in 2021 or 2022. Or it could be carried forward for up to five years after 2022 (assuming the estate is still in existence). Or the estate could claim the entire credit in any of those years (provided it has tax to pay) and not claim it on Josh’s tax return.
Obviously, there are various options here. For example, depending on Josh’s income and tax otherwise payable for 2019, some of the credit could be claimed in his final tax return for that earlier year.