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