Principal Issues:
Whether a gift to a registered charity by a testamentary trust qualifies as a charitable donation under subsection 118.1 of the Act under the following circumstances:
1) The deceased taxpayer’s will clearly outlines which charities are to receive donations and how much each is to receive. The deceased’s will provides that upon the death of his spouse, the estate is to pay a fixed dollar amount to a registered charity or charities. The surviving spouse has an income interest in the trust and consequently will be entitled to receive all the income earned by the trust annually. The children of the taxpayer have a capital interest in the trust. The trustees cannot encroach on the capital of the trust.
2) Same as (1) except the deceased taxpayer’s will only lists a number of charities who would be entitled to receive donations. The will places a maximum dollar value on the total donations to be made. The trustees have discretion as to how much of a donation is to be made (up to the maximum) and which charities will receive donations.
3) Same as (1) except that the trustees have the power to encroach on the capital of the trust.
4) Same as (2) except that the trustees have the power to encroach on the capital of the trust.
Position:
1) Yes, subsection 118.1(5) would apply and the donation can be claimed on the deceased taxpayer’s individual income tax return pursuant to subsection 118.1(3). When the payment is eventually made to the registered charity after the death of the spouse, the trust cannot claim a non-refundable tax credit for a charitable donation under subsection 118.1(3) on the trust return because the deceased taxpayer is the donor, not the trust.
2) In order for subsection 118.1(5) to apply, the terms of the will must expressly state that a specific gift is to be made to the registered charity. This requirement cannot be met if there is discretion on the part of the trustees as to whether or not a gift will be made to the charity.
When there is a distribution from the capital of the trust to the registered charity at the direction of the trustee, the trust can claim a non-refundable tax credit for the charitable donation under subsection 118.1(3) on the trust return.
3) and 4) In cases where the size of a residual or equitable interest at the time of the donation cannot reasonably be determined, such as when a trustee has a right to encroach on the capital of the trust, subsection 118.1(5) does not apply. This position is discussed in paragraphs 3 and 6 of IT-226R, Gift to a Charity of a Residual Interest in Real Property or an Equitable Interest in a Trust.
If a donation is made to a registered charity by the trust, the trust can claim a non-refundable tax credit for the charitable donation pursuant to subsection 118.1(3) of the Act on the trust return.
Reasons: