The laws governing gifts by will – and the pressures they put on executors

When a person dies, their executor has a maximum of 60 months to make any testamentary gifts to charities. For estates that are complex, that might not be sufficient time. Maria Elena Hoffstein and Stephen Hsia argue that extending the window could unlock more giving to the charitable sector.

When a person dies, their executor has a maximum of 60 months to make any testamentary gifts to charities. For estates that are complex, that might not be sufficient time. Maria Elena Hoffstein and Stephen Hsia argue that extending the window could unlock more giving to the charitable sector.

This is the fifth in a series of articles focused on various aspects of charity law that have been a burden on the Canadian charitable and non-profit sector for 70 years. The articles are written by members of the Canadian Bar Association’s Charities and Not-for-Profit Law Section, who deal with these issues on behalf of their clients on a regular basis.

The legal issue that exists

Executors have 60 months from a donor’s death to make any testamentary gifts to charities, if they would like the donor or the donor’s estate to benefit from tax credits arising from the gifts. However, 60 months may not be enough time to make the gift if an estate is complex, in protracted litigation, or has illiquid assets. To achieve fairness, provide certainty for specific giving strategies, and unlock more value for the charitable sector, the authors propose allowing for ministerial discretion to extend the 60-month window for testamentary charitable gifts for those executors and estates that need the additional time the most.

In 2016, Parliament made two important changes that affect testamentary charitable gifts in Canada – that is, gifts made by will or by designation (through a registered retirement savings plan, registered retirement income fund, tax-free savings account, or life insurance).

First, for deaths after January 1, 2016, testamentary charitable gifts are deemed to be made by the donor’s estate at the time when the property is transferred to a charity. For receipting purposes, the fair market value of the gift is to be determined at the time of the transfer of property rather than at the time of the donor’s death.

Previously, “gifts by will” were deemed to have been made by the donor immediately before the donor’s death, and the fair market value of the gift was the fair market value at the date of death rather than the date on which the charity receives the gift. The charitable tax credits resulting from the gift could be used to reduce the tax liability in the donor’s terminal tax return, and any unused tax credits could be carried back to one year before the donor’s year of death.

The second change that Parliament made in 2016 was introducing the concept of a graduated rate estate (GRE). A GRE is an estate that arises on and as a consequence of the death of a person on or after December 31, 2015, that fulfills certain conditions. A GRE remains a GRE for up to 36 months after the person’s date of death.

If a GRE or an “extended GRE” (that is, a GRE that otherwise qualifies as a GRE except for the fact that the 36-month period has expired) makes a gift, then the estate can allocate the charitable tax credits among (1) the terminal tax year of the donor, (2) the tax year preceding the tax year of death, and (3) the tax year of the estate in which the donation is made and any prior GRE years of the estate. The capital gains inclusion rate on death for certain gifts of property (publicly traded securities, ecological gifts, and gifts of cultural property) will also be zero.

The flexibility and tax advantages given to GREs were, and still are, welcome developments. However, the rules do add extra pressure on executors.

Executors need to ensure that estate property is transferred to charities within 36 months after death (or a further two years for extended GREs, for a total of 60 months) in order to be able to allocate charitable tax credits in the year of death or the year prior to death (when most of the donor’s tax liabilities arise). Unlike for some other time periods in the Income Tax Act, there is no provision for ministerial discretion to extend this time period.

This 60-month time limit may be a challenge to meet if the estate is involved in litigation, such as family law claims, dependent relief or wills variation claims, and will challenges. For example, in British Columbia, potential wills variation claimants have up to six months from the time the grant of probate is issued to initiate a claim. Preparing an application for and obtaining a grant of probate can itself take several months or even more than a year, even without defects on the application. Court applications and actions can take years to resolve.

Before distributing estate assets, executors will also want to obtain a clearance certificate from the Canada Revenue Agency (CRA) confirming that the estate has paid all amounts of tax, interest, and penalties owing. The CRA currently advises that its assessment can take up to four months, assuming it has received the necessary documents; however, executors commonly report waiting up to a year, and, in some cases, longer, before obtaining the certificate. Moreover, in certain situations, the CRA may need to perform an audit before it issues the clearance certificate. 

The 60-month limit may also be difficult to meet if the estate’s assets are “illiquid” (such as real estate or art or private company shares). In 2020, the Parliamentary Budget Office estimated that, of their cumulative net worth of $11.7 trillion, Canadian households held approximately $7 trillion in real estate and in listed and unlisted shares. A significant portion of Canadians’ wealth is tied up in generally illiquid assets. Unless a charity can receive gifts in-kind, executors will need time to liquidate the assets before gifting all or a portion of the cash proceeds to the charity.

Types of organizations impacted by the problem and how they work around it

The 60-month time limit for GREs to donate to charities affects individual donors, executors, and charities alike.

Canadians are interested in testamentary charitable giving for many reasons: some wish to leave a legacy after their lifetimes; those same individuals and others may also want to reduce their tax liabilities at death. However, not all individuals can arrange their affairs in an optimal way before death to ensure that the resulting GRE makes the charitable gifts within 60 months of the donor’s death. Not all individuals can anticipate whether their estates will be involved in protracted litigation. Many cannot control when real estate or private company shares are sold. Once the 60-month time period expires, these individuals can no longer avail themselves of the flexibility and tax advantages under the GRE regime.

To shorten the time it takes to make a gift to a charity after their deaths, individuals may wish to leave illiquid assets directly to one or more charities of their choice. This, however, assumes that the recipient charities will be able to accept, and issue a donation receipt for, the illiquid assets at the time the gift is made. Alternatively, individuals may wish to name the charity of their choice as the recipient of a specific cash gift in their wills, rather than as a residual beneficiary (residual beneficiaries will require an accounting of estate assets). However, leaving a cash gift (rather than a residual gift) to a charity in a will may not be the donor’s preference; it generally leaves less to the charity, and the gift will also be delayed if there is no cash or near-cash resources on hand in the estate to make the cash gift.

Executors are affected by the 60-month time period for GREs to make the gift. Even in ordinary circumstances, if the value of estate property increases or decreases following death, then depending upon the tax outcomes, executors could be criticized for either moving too quickly or waiting too long to transfer property to charities within the 60-month period.

To shorten the time it takes to make a gift to a charity after the donor’s death, executors can make interim distributions to charities. However, interim distributions generally require the consent of the other beneficiaries. Also, if the estate assets are difficult to liquidate and if the recipient charity does not accept gifts in-kind, it may not be possible to make interim distributions quickly or in a timely manner.

Finally, charities are affected by the 60-month time limit. If a GRE is unable to make the gift within the 60-month time window, the estate will lose any potential tax savings, thereby eroding the value of any residual gifts.

Potential regulatory solutions that have been proposed

When Parliament first introduced GREs and the changes to testamentary charitable giving in 2016, charities were concerned that estates in litigation or with illiquid assets would be unable to meet the then-36-month time limit. In response to those concerns, the Department of Finance extended the time limit to 60 months, effective January 15, 2016.

More than five years have passed since the rule changes were implemented. The data and the anecdotes are still coming in. As more data comes in, lawmakers will have a better idea as to whether 60 months is a sufficient time period for estates to make testamentary charitable gifts. While 60 months should be sufficient for the majority of executors to make the testamentary charitable gifts, anecdotally, we (the authors) have seen many estates, particularly more complex estates, taking much longer. We expect that the problem will be further exacerbated in the coming years as more Canadians enter their twilight years, accelerating the already-largest intergenerational wealth transfer in history.

The challenge for lawmakers and for the charitable sector is to come up with a rule change that helps executors who need more time to make testamentary gifts but that does not inadvertently incentivize executors to procrastinate the administration of estates or delay testamentary donations.

One potential proposal is to have the Department of Finance allow for ministerial discretion to extend the period or set out a defined process for applying for an extension. By offering a way to extend the GRE period, even on a case-by-case basis, Ottawa can achieve fairness for certain estates and maximize charitable contributions without unintentionally incentivizing delay or procrastination with a blanket extension beyond 60 months.

The benefits of solving this issue for the sector

Allowing certain GREs more time to make their gifts to charity would encourage more testamentary charitable giving and allow charities to retain a greater percentage of testamentary charitable dollars that would otherwise be eroded by the loss of GRE tax benefits. Canadians would have more confidence to leave residual gifts to charities through their wills. Extending the time period for GREs to make testamentary charitable gifts would also remove a disincentive to Canadians seeking to donate very valuable but generally illiquid assets, such as private company shares and real estate, unlocking more giving to the charitable sector.

Canada is currently in the middle of the largest intergenerational wealth transfer in history. With this massive wealth transfer will also come massive tax liabilities and more and more Canadians looking for tax-planning opportunities at death. Extending the GRE time period would incentivize charitable giving, reduce the uncertainty over whether existing giving strategies would work, and achieve fairness for those estates and their charitable beneficiaries that, through circumstances beyond their control, need more time to perfect a gift.


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