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?
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.
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.