Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Where a donation is made by an alter ego trust to a registered charity subsequent to the creator's death, should the donation be treated as a gift which would entitle the trust to claim a tax credit pursuant to subsection 118.1(3) or should it be treated as an allocation of income which may result in a deduction pursuant to subsection 104(6)?
Position:
Question of fact.
Reasons:
Provided that the terms of the trust agreement empower the trustees to make gifts and that the trustees exercise that power, subsection 118.1(3) would apply. Otherwise, if the charity is an income beneficiary and income is allocated to the charity, subsection 104(6) would apply and the deduction thereunder would be restricted as set out therein to exclude among other things deemed gains pursuant to subsection 104(4).
2000-005662
XXXXXXXXXX J.D. Brooks
(613) 957-2103
April 4, 2001
Dear XXXXXXXXXX:
This is in reply to your letter of November 16, 2000 in which you requested our views as to whether an alter ego trust can claim a tax credit for a gift pursuant to subsection 118.1(3) of the Income Tax Act or a deduction from income for an income allocation to a registered charity pursuant to subsection 104(6). You referred to two of our documents, 9728765 and 9918215, and noted that the Department of Finance had commented in its Revised Explanatory Notes issued in June 2000 that the income tax regime for alter ego trusts would parallel the existing rules for spousal trusts. You are particularly concerned with the result in the year in which there is a deemed disposition by an alter ego trust pursuant to subsection 104(4). Your concern focuses on whether a particular distribution out of the income of the trust would be more appropriately described in subsection 118.1(3) or 104(6).
Confirmation of the tax implications of proposed transactions is given only in reply to an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R4. Where the particular situation relates to transactions that have been completed, the enquiry should be directed to the local tax services office where the taxpayer's returns are filed. While we are unable to comment on the particular situation described in your letter, the following general comments may be of assistance to you.
An alter ego trust is described in proposed subparagraph 104(4)(a)(iv) as a trust created after 1999 by a person who has attained 65 years of age wherein the person is entitled to receive all of the trust's income before the person's death, and no one else can, prior to the person's death, receive or use any of the trust's income or capital. Additionally, to be an alter ego trust, the contributor must not have filed an election under proposed subparagraph 104(4)(a)(ii.1). Thus, apart from the age requirement, the requirements are very similar to those for spousal trusts described in paragraph 104(4)(a), which trusts are referred to in the draft legislation released on March 16, 2001 as post-1971 spousal or common-law partner trusts. These trusts may be either inter vivos trusts or testamentary trusts whereas alter ego trusts will be only inter vivos trusts.
Our document 9918215 discussed both inter vivos trusts and testamentary trusts, but not spousal trusts specifically. It commented as to when a trust could claim a tax credit pursuant to subsection 118.1(3) for a gift to a charity and when it could make a deduction from income pursuant to subsection 104(6) for an allocation of income to a charity. It was noted therein that it is a question of fact as to which provision would apply in any particular fact situation. Where the trust agreement empowers the trustees to make a gift and the trustees exercise this power, it would be appropriate for subsection 118.1(3) to apply. On the other hand, where the charity is an income beneficiary and a distribution is made out of the trust's income, subsection 104(6) would be the relevant provision. These comments on subsections 118.1(3) and 104(6) will also apply to alter ego trusts; however, the amount deductible under subsection 104(6) by alter ego trusts will be restricted in certain circumstances, such as the one set out below.
Document 9728765 discussed only testamentary spousal trusts where the trustees were given discretion to make cash donations to a charity after the death of the spouse. As noted in response to Question 5, generally where a gift is made out of a testamentary trust's income to a registered charity, the trust is administratively permitted to choose whether to treat the registered charity for that year as an income beneficiary of the trust or to claim a tax credit for the gift. However, this statement merely reiterates a comment stated in the T3 Trust Guide that pertains only to testamentary trusts and thus will not be relevant to alter ego trusts.
With respect to the amount that may be deductible pursuant to subsection 104(6), our reply to Questions 2 and 5 in document 9728765 noted that where there is a deemed disposition by a spousal trust pursuant to paragraph 104(4)(a), the amount deductible pursuant to subsection 104(6) is restricted. The draft legislation released on March 16, 2001 provides that post-1971 spousal or common-law partner trusts and alter ego trusts, among others, cannot deduct an amount under subsection 104(6) in respect of income accrued up to the end of the deemed disposition day determined under paragraph 104(4)(a).
Other information on gifts may be found in Interpretation Bulletin IT-110R3 (Gifts and Official Donation Receipts) and Interpretation Bulletin IT-226R (Gift to a Charity of a Residual Interest in Real Property or an Equitable Interest in a Trust). We trust that these comments are of assistance to you.
Yours truly,
T. Murphy, Manager
Trusts Section
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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