Murray Landa: Estate gifts of private shares
March 20, 2017 | Articles
By Murray Landa
The federal government is addressing charitable sector concerns regarding estate donation rules in an amendment to the "excepted gift" definition. This was recently announced through a Notice of Ways and Means and Explanatory Notes to the March 22, 2016 Federal Budget.
An unintended consequence of the new estate donation rules flowing from the 2014 Federal Budget resulted in estate gifts of private company shares to registered charities being categorized as a “non-qualifying security.” Therefore, no tax receipt could be issued until the charity sold the shares and only if the sale took place within 60 months after the charity received them.
Good news: the federal government recently announced it will address sector concerns about this issue.
Under the old rules, charitable gifts by will and designation donations were deemed made by the individual immediately before death.
Under the new rules, these gifts are deemed made by the estate when the donated property is transferred to the charity
The new rules brought the following reasoning into play:
An estate is a trust. Trust beneficiaries are not at arm’s length from a trust. Therefore, a registered charity is not arm’s length from the estate of a donor who made a gift by will. When a gift of private shares is made to a charity from a non-arms length donor, the shares are “non-qualifying securities”, therefore no immediate tax receipt may be issued.
This unintended consequence of the new rules needed legislative clarification. The federal government recently announced its intention to do so through a Notice of Ways and Means and Explanatory Notes to the March 22, 2016 Federal Budget.
The Notice includes an amendment to the “excepted gift” definition in s. 118.1(19) (c) of the Income Tax Act, as follows:
(i) if the taxpayer is an individual’s graduated-rate estate,
A) the individual dealt at arm’s length with the donee immediately before the individual’s death, and
B) the graduated rate estate deals at arm’s length with the donee (determined without reference to paragraph 251(1)(b)); or
(ii) if subparagraph ( i) does not apply, the taxpayer deals at arm’s length with the donee; and”
If the above requirements, along with the other requirements of s. 118.1 (19) are met, an estate gift of private shares to a public charity (i.e., charitable organization or public foundation) will be considered an excepted gift. Therefore, with a proper appraisal/valuation of the shares, the charity will be able to issue a tax receipt when the gift is made.
The amendment applies to the 2016 and subsequent taxation years.
This change will benefit donors and those served by charities. Kudos to CAGP’s Government Relations Committee for its work on this issue.
Please note: This is general information. It is not legal advice. Donors and charities should consult their lawyer and accountant for advice specific to their circumstances.