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.
Principal Issues: Whether the equitable interest in the CRT should be characterized as property that is substituted for the remainder interest in the property owned at the time of death that is received by the GRE on and as a consequence of the death of the individual.
Position: No.
Reasons: The law. See comments below.
XXXXXXXXXX 2017-073426
Aleksandra Bogdan
December 2, 2020
Dear XXXXXXXXXX:
Re: Charitable Remainder Trusts
This is in reply to your letter of November 20, 2017, wherein you requested our views on the application of subsection 118.1(5.1). (footnote 1) Your specific concern is whether paragraph 118.1(5.1)(b) will apply to a situation where a gift of an equitable interest in a testamentary trust created by the will of a deceased individual (referred to as a charitable remainder trust or “CRT”) is made to a qualified donee by the deceased individual’s graduated rate estate (“GRE”). You refer to technical interpretation 2016-0625841E5, which expresses our views on this matter. However, it is your view that this technical interpretation did not consider whether the equitable interest in the CRT should be characterized as property that is substituted for the remainder interest in the property owned at the time of death that is received by the GRE on and as a consequence of the death of the individual. Further, it is your view that upon the transfer of the property to the CRT, the GRE receives, in return for the property, a remainder interest in the CRT, which it subsequently transfers to the qualified donee.
Our Comments
This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R10, Advance Income Tax Rulings and Technical Interpretations.
For deaths occurring after 2015, where subsection 118.1(5) is applicable, a gift is generally deemed to have been made by the estate of a deceased individual at the time that the property that is the subject of the gift is actually transferred to the donee. Further, the definition of “total charitable gifts” in subsection 118.1(1) provides that a gift to which subsection 118.1(5.1) is applicable could be included in the calculation of total charitable gifts for an individual (that is not a trust) in the taxation year in which the individual dies or the preceding taxation year of the individual, or in the calculation of total charitable gifts for the estate in the year that the donation is made or a preceding year of the estate when it was a GRE of the individual. Subsection 118.1(5.1) is applicable to a gift where the estate is a GRE or a former GRE that continues to meet all of the requirements of a GRE except for the 36-month time limit (in paragraph (a) of the definition of GRE in subsection 248(1)), the gift is made no more than 60 months after the individual’s death, the death occurs after 2015, and either of the following is applicable:
(a) the gift is deemed by subsection [118.1](5.2) to have been made in respect of the death; or
(b) the subject of the gift is property that was acquired by the estate on and as a consequence of the death or is property that was substituted for that property.
An equitable interest in a trust is created upon the transfer of any property to a trust with the requirement that the property be distributed to a beneficiary at some future date (i.e., when an income interest of another person ends). It has been the CRA’s longstanding view that the subject of the gift to the qualified donee is not the property transferred to the CRT, but the equitable interest in the CRT. Specifically, the CRT receives the property and the qualified donee receives an interest in the CRT.
In order to determine whether an equitable interest in a CRT, to which the property is transferred, is considered to be substituted property for the property received by the GRE on and as a consequence of the death, we must consider the ordinary meaning of the term “substituted property” as well as the extended meaning of substituted property in subsection 248(5). The following discussion was provided in our response to Question 11 of the 2015 STEP CRA Roundtable:
The Canadian Oxford Dictionary (2001) contains the following definitions of “substitute”:
… A thing that is or may be used in place of another, often to serve the same function but with a slightly different effect … replace (a person or thing) with another …
Similarly, Black’s Law Dictionary (1999) defines “substitution” as “… the process by which one person or thing takes the place of another person or thing.
Paragraph 248(5)(a) states that where there are multiple substitutions the final property held will be considered to be substituted for the original property held.
The term substituted property was considered in McLaughlin v. MNR, [1952] C.T.C. 104 (Exch. Ct.) . The taxpayer, Mr. X, sold shares of XCo to his wife, Mrs. X for par value. Mrs. X subsequently acquired shares of YCo for consideration consisting of the XCo shares. The issue before the Court was whether a dividend received on the YCo shares was subject to attribution under former subsection 32(3) of the Act by virtue of these shares constituting property substituted for property transferred from Mr. X to Mrs. X. The Court was of the view that the YCo shares were property substituted for the XCo shares as substituted property was property which replaces, or takes the place of, the original property.
For the purposes of this discussion, we have assumed that a CRT is created by the will of a deceased taxpayer to hold property in order to fulfill a gift by the deceased to a qualified donee. The terms of the will require the trustees to pay all of the income earned by the CRT to the taxpayer’s surviving spouse (or other family member) and, on the death of the taxpayer’s spouse (or other family member, if applicable), to transfer the property to the qualified donee. The property transferred to the CRT by the GRE is the property that was received by the GRE on and as a consequence of the death of the individual.
It is our view that the equitable interest in the CRT is created as a result of the transfer of property to the CRT by the GRE. The gift of the equitable interest in the CRT is considered to have been made to the qualified donee when the property is transferred to the CRT, provided that the equitable interest in the CRT vests with the qualified donee at that time (and all other requirements are met). (endnote 1) The GRE does not receive the equitable interest in the CRT in return for the transfer. Further, it is our view that the property received by the GRE on and as a consequence of the death of the individual is not substituted for or replaced by the equitable interest in the CRT received by the qualified donee. As a result, the equitable interest in the CRT is not property received by the GRE on and as a consequence of the death, or property substituted for that property. Accordingly, paragraph 118.1(5.1)(b) does not apply to the situation described.
However, as noted in technical interpretation 2016-0625841E5, by virtue of the definition of “total charitable gifts” in clause 118.1(1)(c)(ii)(A), the eligible amount of a gift of an equitable interest in a CRT may be included in the calculation of the total charitable gifts of the GRE for the year that the transfer is made or any of the 5 following years.
We hope that these comments will be of assistance to you.
Yours truly,
Marina Panourgias, CPA, CA, TEP
Manager, Trust Section I
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or a subparagraph is a reference to the relevant provision of the Income Tax Act.
ENDNOTES
1 Refer to paragraph 2 of Archived Interpretation Bulletin, IT-226R, “Gift to a Charity of a Residual Interest in Real Property of an Equitable Interest in a Trust”.
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