If you donate a specific sum (for instance $100,000) in your will, you will need to review your will more often to determine if this is enough or too much. On the other hand, gifting a percentage of your estate allows for some flexibility as the value of your assets fluctuates.
Donating to charity in your will reduces the tax owed by your estate. This is because Canadian income tax law treats a deceased person as having sold all their capital property for fair market value, resulting in tax on any accrued capital gains. Capital property typically includes real estate, land, non-registered investments and shares in private corporations. When a donation is made in your will, your estate will receive a donation receipt for the amount of your gift, which will reduce or possibly even eliminating taxes on death.
You can include a charitable gift in your will simply by naming a charity as a beneficiary of cash, shares or other property under your will. For example, your will could provide for a bequest to a charity of a particular sum for general purposes (e.g., “the sum of $10,000 to XYZ University”) or for a specific purpose (e.g., “the sum of $10,000 to XYZ University to be used to provide bursaries to students in the Faculty of Education at XYZ University who have demonstrated academic excellence”).
With regard to the tax treatment of a gift through a will, the annual donation claim limit is 100% of net income in the year of death and of the year immediately preceding death if the deceased’s estate is considered a “graduated rate estate” (GRE) at the time the gift is made to the charity. A GRE is essentially an estate that arose on, and as a consequence of, the death of an individual. It is important to note that a GRE can only qualify as such for up to 36 months following the date of death of the individual. If, during those 36 months, the estate makes a charitable donation, the donation tax credit may be allocated among any of the following tax years: the taxation year of the estate in which the gift is made to the charity, any prior taxation year of the estate, the year of death, and the year immediately preceding death. In addition, the usual five-year carry forward rule will apply.
The following example illustrates how these rules could be applied:
Nicole died on December 30, 2022 in Ontario at the age of 88. At the time of her death, she had cash of $400,000 in an investment account, she owned a parcel of land on Golden Pond, which she bequeathed to her sister Monique, and she had an investment portfolio, which she bequeathed to her nephew David. She acquired the land on Golden Pond for $20,000 and at the time of her death, it had a fair market value of $280,000. The investments had a cost base of $80,000 and at the time of her death, they were worth $400,000. The cash in the investment account generated $20,000 in interest in 2022. Therefore, her net income for 2022 was $310,000. The net interest income of her estate in 2023 was $30,000. Nicole made a charitable gift of $325,000 under her will, which was paid to the charity in January 2024. In total, Nicole and her estate are entitled to a donation tax credit of $143,481 (i.e., $325,000 x 44.148%). To eliminate the taxes owing in 2022 (i.e., $165,914), Nicole’s executors under her will elect to apply $310,000 of the donation against her net income in 2022, leaving taxes owing of $29,055. To eliminate the taxes owing in 2023 (i.e., $6,015), Nicole’s executors elect to apply $13,624 of the donation against her estate’s income in that year (only $13,624 of the donation is used in that year because that is all that is required to reduce taxes owing to nil). If Nicole paid taxes in 2021 against which the donation tax credit could be applied, the remaining $1,376 of the donation could be used to reduce her taxes in 2021.
Therefore, to recap, Nicole’s donation of $325,000 reduced total taxes owing by her and her estate from $171,929 to $29,055 and could reduce any taxes paid by Nicole in 2021.
Carole Chouinard
Partner
Gowling WLG
Many University of Ottawa alumni have included a gift to the University and its students in their estate plans. It is important to inform the University of your intention as our planned giving team will be able to validate the designation of your future gift with you. To learn more about this type of philanthropic project, please contact us. Thank you for your support!
