11 December 2003 External T.I. 2003-0182905 - GIFTS OF INTEREST IN ALTER EGO 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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Can an alter ego trust claim a tax credit under subsection 118.1(3) when it distributes property to a charity in respect of the charity's capital interest, after the death of the income beneficiary?

Position:

No, unless the trustees may reasonably be viewed to have discretion, under the terms of the trust, whether or not to distribute property to the charity.

Reasons:

If the charity receives property in satisfaction of its interest in the trust, the distribution of property is not a gift. However, the charity's interest in the trust may have been a gift. If the donor did not receive a tax credit when the trust was created because the charity's interest could not be valued (e.g., because of the income beneficiary's right to encroach), the donor's tax return for that year and for the following five taxation years could be amended once the gift can reasonably be valued provided the relevant taxation years are still open. If the charity receives property as a consequence of the trustee exercising discretion to distribute property to it, the distribution of property is gift.

XXXXXXXXXX 							2003-018290

December 11, 2003

Dear XXXXXXXXXX:

Re: Subsection 118.1(3) and Alter Ego Trusts

This is in reply to your letter of January 14, 2003 requesting our comments on the application of subsection 118.1(3) of the Income Tax Act ("the Act") in circumstances where an individual has created an alter ego trust, and names a registered charity as the capital beneficiary of the trust after his or her death. In particular, you ask whether a tax credit may be claimed by the trust after the death of the settlor of the trust and if so, what is the proper procedure when the physical transfer of the trust property to the charitable beneficiary cannot be completed until after the end of the trust's taxation year.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an Advance Income Tax Ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.

In general, an individual may benefit a charity through the creation of a trust in two ways. First, the individual could, in the terms of the trust agreement, empower the trustees to make gifts to charity. If the trustees then exercise that power a tax credit may be available to the trust pursuant to subsection 118.1(3) of the Act. It is a question of fact and law whether the terms of a particular trust agreement provide such discretion to the trustees.

Second, the individual can give an equitable interest in the trust to the charity. A gift of an equitable interest in a trust to a registered charity may entitle the donor to a tax credit pursuant to subsection 118.1(3) of the Act. In general, the CCRA will consider a gift to have been made if all of the requirements listed below are met.

(a) There must be a transfer of property voluntarily given with no expectation of right, privilege, material benefit or advantage to the donor or a person designated by the donor. This condition is subject to the draft legislation released by the Department of Finance in December, 2002, which proposes to permit the recognition of a gift, for tax purposes, in some circumstances where the donor receives consideration or a benefit for the transfer of property. The draft legislation is discussed in CCRA Technical News No. 26 which may be found on the CCRA website at http://www.ccra-adrc.gc.ca/tax/technical/incometax/itnews3-e.html.

(b) The property must vest with the recipient organization at the time of transfer. A gift is vested if

(i) the person or persons entitled to the gift are in existence and are ascertained,

(ii) the size of the beneficiaries' interests are ascertained, and

(iii) any conditions attached to the gift are satisfied.

(c) The transfer must be irrevocable.

(d) It must be evident that the recipient organization will eventually receive full ownership and possession of the property transferred.

Once it is established that a gift has been made, the value of the gift at the time of the transfer must be determined before it can be claimed for income tax purposes. Where the charity is gifted an equitable interest in a trust, the value of that interest will depend upon a variety of factors, such as the nature of the trust property, the age of any income beneficiaries, interest rates, mortality tables, and anticipated future economic conditions.

In general, the value of a gift that is an equitable interest in a trust cannot be established at the time of the gift if an income beneficiary has a right to encroach on the capital of the trust. Therefore, a deduction or tax credit in respect of the donation is generally not available in such circumstances. Reference may be had to CCRA Interpretation Bulletin IT-226R, "Gift to a Charity of a Residual Interest in Real Property or an Equitable Interest in a Trust " in this respect, which is available on the CCRA website at http://www.ccra-adrc.gc.ca/E/pub/tp/it226r/it226r-e.html. In such circumstances, the CCRA will generally allow a donor to amend his or her tax returns for the relevant taxation years to include the amount of the gift in computing his or her "total charitable gifts" within the meaning of subsection 118.1(1) of the Act if the value of the gift should become quantifiable during the normal reassessment period for the taxation year in which the gift was made or for any of the five taxation years following the year in which the gift was made (or, if waivers have been provided by the taxpayer in respect of those years).

We appreciate that, in such circumstances, it may well be simpler (and thus preferable to a donor) if the alter ego trust could simply claim the tax credit in respect of the gift at the time that trust property is distributed to a qualified donee, rather than the donor (or his or her estate, as the case may be) assessing at that time what was the value of the donee's trust interest when the trust was settled and amending prior tax return(s). However, we do not believe that this option is available under the current legislation. Accordingly, we have brought this matter to the attention of officials of the Department of Finance for their consideration and review.

Although the foregoing comments are not binding on the CCRA, we trust that they will be of assistance to you.

Yours truly,

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