8 February 2000 External T.I. 1999-0007035 - DIRECTED GIFT REMAINDER INTERESTS

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:

1. Whether transfer of remainder interest in principal residence to a registered charitable foundation, subject to an agreement, would qualify for a charitable donation tax credit.

2. Whether the transfer of a remainder interest in a stock portfolio to a registered charitable foundation would qualify for a charitable donation tax credit.

Position:

1. Yes, based on the facts provided.

2. Depends upon whether the trust agreement is such that the remainder interest in the portfolio vests in the Foundation and whether the fair market value of the residual interest in the trust holding the portfolio of shares can be reasonably determined at the time of vesting.

Reasons:

1. Agreement does not require the donee to undertake any action that are not part of its objects, does not significantly limit the flexibility to the Foundation to do with the property as it wishes (once it takes possession of the property), and does not result in benefits accruing to the donor or persons not at arm's length with the donor.

2. Gift takes place when property vests in the Foundation and if fair market value cannot be determined, no donation receipt can be issued since receipt must show fair market value of gift.

XXXXXXXXXX 		1999-000703

Attention: XXXXXXXXXX

February 8, 2000

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

This is in reply to your fax of November 3, 1999, wherein you requested our views on the issuance of a charitable donation receipt by the XXXXXXXXXX (the "Foundation") in respect of a gift of a residual interest in property which is subject to certain conditions.

The determination of whether or not a transaction results in a gift for purposes of the Income Tax Act can only be made upon a complete examination of all the facts. Accordingly, we will provide you with general comments on our views on various factors relating to gifts of residual interests in property and donations subject to directions, however, the comments are not binding on the Agency, with respect to a specific set of facts. With respect to specific transactions, a prospective donor may wish to submit a request for an advance income tax ruling in the manner set out in Information Circular 70-6R3, Advance Income Tax Rulings.

Your inquiry seems to deal with two primary issues:

1. Gifts of Residual Interests in Property

2. Gifts Subject to Direction

Our views with respect to each of these issues is discussed below.

Gifts of Residual Interests in Property

Our general views with respect to the gifting of residual interests in property can be found in Interpretation Bulletin IT-226R. The interpretation bulletin discusses two types of property and the issues related to the gifting of a residual interest in each. The first type of property is real estate, which can generally be legally divided into separate interests, such as a lifetime interest and a residual or remainder interest. A taxpayer may, by way of gift or sale, dispose of only the remainder interest in a piece of real estate and retain the life interest in the property. When a gift is made of a remainder interest in real property, it is the remainder interest in the property which is considered to have been disposed of for purposes of the Act. To the extent the fair market value of that residual interest in the real property exceeds the proportion of the adjusted cost base reasonably allocated to the residual interest, the donor will have a taxable capital gain in respect of the property. The recipient charity could only issue a charitable donation receipt for the fair market value of the residual interest, at the time that the residual interest vests in the charity and only to the extent that the fair market value of the residual interest can reasonably be determined at that time.

The second type of property dealt with in the interpretation bulletin is all property except real property. A residual interest in property, other than real estate, can only be transferred to another person by means of a trust. In most charitable remainder trust situations, a property is disposed of to a trust, with the donor retaining an income interest in the trust, and the charity being given the residual interest in the trust. It is the residual interest in the trust, and not the property transferred to the trust, which is considered to be the "gift" to the charity for the purposes of issuing a charitable donation receipt. A gift is not considered to have been made, and a donation receipt could not be issued by the charity until the residual interest in the trust vests in the charity. This means that the trust must be irrevocable and there must be not right of any person to encroach on the capital of the trust. If the trust is revocable, or there is a right of capital encroachment in the trust held by anyone except the charity, no gift is considered to have been made to the charity.

The charity could not issue a donation receipt, even if the residual interest in the trust or the piece of real property has vested, if the fair market value of the residual interest in the trust cannot be reasonably determined. The valuation should take into account such things as the nature of the parcel of real estate or the underlying property in the case of a trust, the age of the donor, interest rates, mortality tables, and anticipated future economic conditions. In the case of some types of property, such as shares, a reasonable determination of fair market value may not be possible.

With respect to the remainder interest in a principal residence, which may be transferred to a charity without the use of a trust arrangement, the charity should consider the potential application of subsection 118.1(16) to the property being received. Subsection 118.1(16) will generally apply where a donor transfers property to a charity, with which the donor does not deal at arm's length, and within the 60 month period following the transfer of the property, the donor uses the property. If subsection 118.1(16) applies to a transaction, the value of the gift for receipting purposes is deemed to be nil. Provided the donor in this situation and the Foundation deal at arm's length, subsection 118.1(16) would not apply.

In the situation you described, the Foundation needs to consider whether its rights to the remainder interest in the principal residence and the residual interest in a trust to which the shares would have to be transferred, have vested. Then the Foundation must consider whether a reasonable determination of the value of the remainder interest in the principal residence and the remainder interest in the trust to which the shares would have to be transferred, can be done. Finally, the Foundation must consider whether the donor may not be at arm's length with the Foundation, which is a question of fact. If there is vesting and a reasonable valuation can be done, and the donor is at arm's length with the Foundation, then the Foundation would be able to issue a donation receipt, subject to satisfying the conditions for a directed gift, which are discussed below.

Gifts Subject to Direction

In our view, certain donations subject to a general direction from the donor are acceptable as a gift for income tax purposes providing certain conditions are met. In this respect, paragraph 15(f) of Interpretation Bulletin IT-110R2, Gifts and Official Donation Receipts, states, "a charity may not issue an official receipt for income tax purposes if the donor has directed the charity to give the funds to a specified person or family. In reality, such a gift is made to the person or family and not to the charity. However, donations subject to a general direction from the donor that the gift be used in a particular program operated by the charity are acceptable, provided that no benefit accrues to the donor, the directed gift does not benefit any person not dealing at arm's length with the donor, and decisions regarding utilization of the donation within a program rest with the charity."

Where the donor and a charity enter into an agreement that the charity will use the donated property in a manner which is consistent with the ordinary objects and operations of the charity, and which does not result in any benefit accruing to the donor or a person not at arm's length with the donor, our view would be that the gift would not be tainted by the general direction.

The issue was also considered as to whether a stipulation that the Foundation, if it were to dispose of the property transferred to it, must either transfer it to another qualifying donee or if sold, to distribute a portion of the proceeds it receives to other qualifying donees, may taint the gift received by the Foundation. In absence of an agreement, the

Foundation would have the right to keep the property, transfer it to another charity or sell it to a non-charity. A charity is generally permitted to distribute property to other qualified donees. Therefore, we are of the view that the character of transferred property would not be tainted as a gift, to the extent that direction provided under an agreement in respect of the property does not result in any benefit accruing to the donor or a person not at arm's length with the donor, does not require the charity to use the property for purposes which are not within the scope of its charitable objects, and does not limit the flexibility of the charity to use the keep or dispose of the property.

We hope our comments are of assistance.

Yours truly,

F. Lee Workman
Manager
Financial Industries Division
Income Tax Rulings Directorate
Policy & Legislation Branch