Estate Donations and Non-Qualifying Securities
Since the announcement of the “estate donation” rules in the 2014 Federal Budget, there have been a number of amendments that have addressed sector concerns and drafting errors. One unintended consequence in the original estate donation provisions relates to gifts of private company shares.
At the June 2015 STEP conference in Toronto, Canada Revenue Agency confirmed that all estate donations of private company shares to any registered charity would be categorized as a non-qualifying security, not just gifts to private foundations. As a result, no tax receipt could be issued until the shares are sold within a 60-month window. The previous treatment of gifts by will allowed gifts of private company shares to public charities, i.e. charitable organizations and public foundations, to be receipted.
The change in tax treatment occurred inadvertently due to the identity of the donor. Previously the gift was made just prior to death and the deceased donor was considered to be an individual. Under the new rules the donor is the estate and the gift is made after death.
The problem? The estate is a trust. Any person/entity that is a beneficiary of a trust is not at arm’s length with the trust. Therefore, any registered charity is non-arm’s length from the estate of the donor that made a gift by will. When a gift of private shares is to a charity that the donor is not at arm’s length with the shares are categorized as non-qualifying securities, hence no immediate receipt may be issued.
On October 19, the Notice of Ways and Means and Explanatory Notes to the March 22, 2016 Federal Budget was released. Included in the Notice is an unannounced but welcome change to the excepted gift definition in Subsection 118.1(19), which relates to estate donations of private company shares to public charities.
Paragraph 118.1(19)(c) has been amended to provide an exception to the non-qualifying security rules for an estate donation. Effective for donations made after 2016, the new rules make a private share donation eligible if:
the deceased donor dealt at arm’s length with the recipient charity immediately before his or her death, and
the graduated rate estate deals at arm’s length with the donee determined without regard to paragraph 251(1)(b) of the Act.
Through the Canadian Association of Gift Planners, I was involved in discussions with the Department of Finance on this issue. Despite the multiple drafts the Department deserves praise for the quality of its consultation process and consideration of the needs of registered charities and donors.