CPABC in Focus November/December 2014 | Page 36

Charitable donations Charitable donation planning is often used to offset the large tax bill on death. In the case of a spousal or JP trust, charitable donations must be made in the trust to offset the tax on the deemed disposition on death. A spousal or JP trust may only claim a donation made to a qualified donee in the same year as the deemed disposition, and it may only claim an amount up to 75% of its income. In addition, the donation cannot be carried back, but can be carried forward five years. Further complication arises where trustees have the discretion to make a donation, as it is not always clear whether the recipient charity is considered to be a qualified donee, or a beneficiary of the spousal or JP trust. If the charity is considered a beneficiary, then the contribution is denied as a donation and treated as a distribution to a beneficiary. On the other hand, a donation made in a settlor’s will is deemed to be made by the individual immediately before death.13 In the year of death, a donation can be claimed for up to 100% of the individual’s income, and this donation can be carried back to the year immediately prior. Accordingly, John and Jane should consider their charitable intentions carefully when using a spousal or JP trust. Contributions of real estate In addition to their preferred shares and portfolio, John and Jane may want to consider contributing their principal residence and/ or vacation property to a spousal or JP trust. If that’s the case, land transfer tax would need to be considered where the property changes title from John and/or Jane to a trust, and when the property is eventually distributed by the trust to a beneficiary.14 Something else to consider: A trust may claim the principal residence exemption, but the normal principal residence exemption rules apply. Tax debts and property transfers It is important to consider the implication of tax debts when transferring assets between spouses. In the case of John and Jane, suppose John has a tax debt of $10,000 and transfers property to Jane—either directly, indirectly, or by means of a trust. The Income Tax Act will impose joint and several liability to Jane for John’s tax debt, up to the lesser of the tax debt and the FMV of the property transferred, net of consideration given by Jane.15 Closing thoughts Spousal and JP trusts can be effective estateplanning tools, but due care must be taken in managing the income tax consequences. Subsection 118.1(5). 13  here may be an exemption or mitigation strategy. T 14 Subsection 160(1). 15 Mertens Valuation Services Ltd. Independent Expert Advice Rick Mertens has been assisting fellow accountants and their clients with independent business valuation and related services for the past 10 years. Rick is located in the Greater Vancouver area but regularly works with clients located throughout British Columbia. Rick is committed to providing high quality service in a personalized, timely and cost effective manner. He has extensive experience in business valuations, economic loss claims and transaction advisory. In addition to his CBV and CPA / CGA designations, Rick has also completed the 3-Year In-Depth Tax Program of the CICA and other specialized courses, and can assist with various planning matters. Business Valuation | Litigation Support | Transaction Advisory Rick Mertens, CBV, CPA, CGA #2300 – 2850 Shaughnessy Street Port Coquitlam, BC, V3C 6K5 604-518-7551 | [email protected] www.mertensvaluation.com | facebook.com/mertensvaluation www.linkedin.com/in/rickmertens 36  CPABC in Focus • Nov/Dec 2014