Tax Rules for Charitable Bequests in a Canadian Will
What is a Charitable Bequest?
A charitable bequest is a gift left to a registered charity through a Will. Unlike a donation made during someone's lifetime, a charitable bequest takes effect on death, and it is the estate (rather than the donor) that is treated as having made the gift.
Charitable bequests can be:
a fixed sum of money (e.g. $10,000)
a specific asset identified in the Will
an amount determined by a formula (e.g. "one-half of the net sale proceeds of my residence")
a percentage of the estate (e.g. 10% of the estate)
Taxes arising on Death
There is no "inheritance tax" or "estate tax" in Canada. Still, when a resident of Canada dies, their estate can be subject to a significant amount of Canadian income tax. This can include tax on income earned by the deceased in the year of death, tax on capital gains arising from the deemed disposition of assets at death, and income earned by the estate after death.
The "deemed disposition" often gives rise to a large amount of tax because the general rule in Canada is that, upon death, a person is deemed to have sold all their assets for fair market value — even though there has not been any actual sale. This deemed disposition can result in a capital gain, and an income tax obligation that must be paid by the estate.
Charitable bequests made in a Will can reduce the estate's income tax liability.
How the Donation Tax Credit Works at Death
The charitable donation tax credit is calculated based on the eligible amount of a charitable gift.
There are rules regarding how charitable donation credits are calculated and can be applied to reduce a person's income taxes during their lifetime. There are some slight variations in the case of a donation tax credit that arises from a donation made in a Will:
The income limit rises to 100%. During a person's lifetime there is a limit to claiming donations equal to 75% of the person's net income. Donations claimed on the deceased's final return can generally be claimed up to 100% of the deceased's net income. Any eligible amount that cannot be claimed on the final return may be claimed on the return for the preceding year, also subject to a 100% limit.
The tax credit claim can be split. Donation tax credits arising from a gift in a Will may be claimed on the deceased's final tax return, on the tax return for the year prior to their death, or they may be claimed by the estate, subject to certain rules discussed below.
In practice this means a substantial charitable gift can offset most or all of the income tax otherwise payable for those years.
Where a Graduated Rate Estate (GRE) Changes the Timing
A graduated rate estate (GRE) is an estate that meets certain conditions under the Income Tax Act. It can qualify as a GRE for up to 36 months after death.
Where a gift is made by a GRE, the estate's legal representative has flexibility to allocate the resulting donation tax credits among:
the GRE's taxation year in which the donation was actually made to the charity
an earlier taxation year of the GRE
either of the deceased's last two taxation years
Similar flexibility applies to a gift made within two years after an estate stops being a GRE (up to 60 months after death), as long as the estate continues to meet all the other conditions of being a GRE (other than the 36-month limit).
With this flexibility, a charitable donation tax credit can be directed in the way that is most beneficial to the estate.
Carrying Forward What Cannot Be Used
Where the full donation amount cannot be used by the estate in a single year, the unused portion can generally be carried back in the way described above, or carried forward by an estate for up to five years.
Official donation receipts from the charity are needed to support any claim, and only gifts to registered charities or other qualified donees recognized by the CRA are eligible.
Naming a Charity Outside the Will
Some assets can pass to a charity by beneficiary designation rather than through a Will, through registered plans such as RRSPs and RRIFs, and through life insurance policies. In these cases, the gift is not made from the estate, but instead passes directly to the charity. Nevertheless, the donation tax credits arising from these donations can still be available for use by the estate.
This works differently in Quebec. Quebec has different succession rules for beneficiary designations. In particular, beneficiary designations for registered plans such as RRSPs and RRIFs generally cannot be made in the same way as in the common-law provinces, and Quebec does not recognize certain TFSA beneficiary designations. The applicable rules depend on the type of plan and the form of designation. For insurance products, separate rules under the Civil Code of Québec apply.
In the common-law provinces a designation filed with the institution is generally effective, though the interaction with the Will still needs care so the two documents do not conflict.
Epilogue covers this in more detail in How to Leave a Gift to Charity Using a Registered Account in Canada.
Drafting the Gift So It Works
A few things determine whether a charitable bequest does what was intended.
Identify the charity precisely. Full legal name, and the CRA charitable registration number where possible. Charities merge, rename and wind up; a gift to a vaguely described organization can be difficult for an executor to carry out.
Say what kind of gift it is. A fixed amount, a specific asset, or a share of the residue. A gift of a specific asset can fail entirely if that asset is no longer owned at death, whereas a share of the residue adjusts with the size of the estate.
Consider a backup. Naming an alternate charity, or giving the executor power to direct the gift to a similar organization, protects the gift if the named charity no longer exists.
Keep the Will current. A change in circumstances, or in the charity itself, can make an existing gift ineffective or no longer reflect what was intended.
Consider the effect on other beneficiaries. A charitable gift reduces what is available to family. Where that is likely to surprise anyone, saying so during life tends to prevent disputes later.
Where Epilogue Fits
Epilogue is an online estate planning platform designed by former estate lawyers, and it covers residents of all ten provinces. A Will can generally be completed in about 20 minutes, with charitable gifts specified through guided questions rather than legal drafting, free updates for life, and data stored in Canada.
To date, tens of thousands of Wills have been created through Epilogue, including approximately $500 million in legacy gifts left to charities.
Epilogue is best suited for straightforward estates. However, it is not the right tool for every situation — complexities like blended families, excluding a child from a Will, or an estate large enough that tax planning drives the structure, all warrant professional advice. For charities looking at legacy giving programs, Epilogue runs a dedicated charity program, and its Learn Centre covers the underlying concepts in more depth.
Key Points
Canada has no estate or inheritance tax; a charitable bequest reduces income tax payable on the final return or by the estate
The donation credit limit rises from 75% to 100% of net income in the year of death and the preceding year
A graduated rate estate lasts up to 36 months and can allocate a donation to its own year, an earlier GRE year, or either of the deceased's last two taxation years
Unused donation amounts can generally be carried forward five years
Only registered charities and qualified donees qualify, and receipts are required
Beneficiary designations on registered plans do not work the same way in Quebec as in the common-law provinces
FAQ
What is a charitable bequest?
A gift left to a registered charity through a Will, taking effect on death.
Does Canada tax an estate when someone dies?
Not as an estate tax — Canada has neither an estate tax nor an inheritance tax. However, income tax arises from income earned prior to the individual's death, capital gains arising from the deemed disposition of assets on death, and income earned by the estate after the person's death.
How much of a charitable gift can be claimed in the year of death?
The limit rises from the usual 75% of net income to 100% for the year of death and the year before death.
Can the estate claim the credit rather than the deceased?
Often, yes. Where the gift is made by a graduated rate estate, the legal representative can allocate the charitable donation tax credit to the estate's year of donation, an earlier taxation year of the GRE, or either of the deceased's last two taxation years.
What happens to donation amounts that cannot be used?
They can generally be carried forward for up to five years.
Which charities qualify?
Registered charities and other qualified donees recognized by the CRA. An official donation receipt is required.
Can a charity be named as beneficiary of an RRSP instead?
In the common-law provinces, generally yes. In Quebec, beneficiary designations cannot generally be made in this way.
Should a lawyer be involved?
For some straightforward estates, an online Will platform may be appropriate. Where the estate is complex, or tax planning is driving the structure, professional advice may be appropriate.
Disclaimer: Epilogue is not a law firm and cannot provide any legal advice. This article is for informational purposes only and may not cover all legal considerations. For complex estate planning needs, consult a qualified estate planning professional.
