24 July 2001 External T.I. 2001-0086825 - CHARITABLE REMAINDER TRUST

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: Whether distributions of capital gains, returns of capital and payments of expenses from the capital account by a trust will be considered encroachments on capital such that a gift of an equitable interest in a trust to a qualified donee would not be considered to have been made by the donor.

Position: Generally, yes.

Reasons: See document

XXXXXXXXXX 						2001-008682

July 24, 2001

Dear XXXXXXXXXX:

Re. Charitable Remainder Trust

This is in reply to your letter of June 4, 2001, wherein you requested our views as to whether distributions of capital gains, returns of capital and payments of expenses from the capital account by a trust will be considered encroachments on capital such that a gift of an equitable interest in a trust to a qualified donee would not be considered to have been made by the donor.

Specifically, you have asked us to consider a situation whereby a donor has transferred units of a monthly high income mutual fund trust which makes regular distributions of interest, dividends, capital gains and returns of capital into a trust. According to the terms of the proposed trust document, the donor will be entitled to the income of the trust, capital gains, and returns of capital and a registered charity will be entitled to the residual of the trust. The trust document will also provide that expenses incurred by the trust are to be paid out of the capital of the trust and the trustee may not make any distributions that would reduce the value of the trust below the value of the initial contribution.

The particular circumstances described in your letter appear to be a factual situation involving specific taxpayers. As explained in Information Circular 70-6R4 dated January 29, 2001, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we can offer the following general comments which may be of assistance.

In order to qualify as a gift, the size of the beneficiaries' interest must be ascertainable in order for the gift to vest - if there can be encroachments on capital the size of the gift cannot be ascertained and cannot be said to have vested. In our view, distributions of capital gains, returns of capital and paying expenses out of capital are all encroachments on capital regardless of the language employed in the trust document and a gift cannot be said to have been made in the circumstances.

Generally, in the situation where the life tenant or trustee has a right to encroach on the capital of the trust, it would not be possible to reasonably determine the value of the capital interest in the trust even if there is a restriction on distributions. Clearly, the payment of expenses of the trust out of the capital of the trust is an encroachment on capital. Similarly, distributions of unrealized gains can result in an encroachment on capital if such unrealized gains are not subsequently recognized. Restrictions on distributions to the donee where the capital of the trust is below a threshold amount does not alleviate the potential for the erosion of capital. Further, in the case of some types of property held by a charitable remainder trust, such as shares or units in a mutual fund trust, a reasonable determination of the fair market value of the equitable interest in the trust may not be possible.

We hope that our comments will be of assistance.

Yours truly,

F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch