CRA states that the will-directed formation by a GRE of a charitable remainder trust cannot benefit the deceased’s terminal return under s. 118.1(5.1)(b)
S. 118.1(5.1)(b), when read together with the s. 118.1(1) - “total charitable gifts” – (c)(i)(C) definition, generally indicates that a gift by a graduated rate estate made within 5 years of the deceased’s death can be deemed to be a gift made by the deceased if the gift was of (i) property that was acquired by the GRE on and as a consequence of the death or (ii) property that is substituted for that property
Suppose that the terms of a charitable remainder trust (“CRT”), created by the will of the deceased taxpayer to hold property of the deceased received by the GRE, provide for all the income earned by the CRT to be paid to the surviving spouse and, on the death of that spouse, for the property to be transferred to a qualified donee. Will s. 118.1(5.1)(b) apply to the gift of the equitable interest in such testamentary trust on the basis that such interest is 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?
CRA essentially indicated that this question was assuming a form of transaction at a variance with what CRA saw. It responded:
[T]he 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).
Since the equitable interest of the donee arose at the moment of the creation of the trust, CRA did not construe there to be a gift of substituted property by the GRE (or of the remainder interest itself) – so that s. 118.1(5.1)(b) did not apply.
Neal Armstrong. Summary of 2 December 2020 External T.I. 2017-0734261E5 under s. 118.1(5.1)(b).