23 December 1993 Income Tax Severed Letter 9336665 - Irrevocable 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.

XXXXXXXXXX                                933666

Attention: XXXXXXXXXX

December 23, 1993

Dear Sirs:

Re: Irrevocable Charitable Remainder Trust ("CRT")

This is in reply to your letter of November 9, 1993, which was forwarded to us for reply from the Charities Division.

                    XXXXXXXXXX

You have requested our views as to whether your Foundation can issue charitable donation receipts, whether the value of the donation would be included in the calculation of the Foundation's disbursement quota, how the discount from the face value of the donation would be calculated and whether Revenue Canada would provide an advance income tax ruling on the amount of the discount.

Our Comments

The situation described in your letter involves actual proposed transactions with identifiable taxpayers. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70- 6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Taxation. However, we can offer the following general comments.

The Department's position with respect to gifts of equitable interests in trusts made to charitable organizations is found in Interpretation Bulletin IT-226R entitled "Gift to a charity of a residual interest in real property or an equitable interest in a trust". A copy of IT-226R is enclosed.

IT-226R states, inter alia, that a gift of an equitable interest in a trust to a registered charity or certain other organizations (described in subsection 110.1(1) or 118.1(1) of the Income Tax Act (the "Act")) may qualify as a deduction in computing taxable income, if donated by a corporation, or as a non-refundable federal tax credit, if donated by an individual. For a corporation, subsection 110.1(1) provides for the deduction, and for an individual, subsection 118.1(3) provides for the tax credit.

An equitable interest in a trust is created upon the transfer of any property to a trust with the requirement that the property be distributed to a beneficiary at some future date (ie. when an income interest of another person ends). A gift of an equitable interest could be made through a testamentary trust or an inter vivos trust. An inter vivos gift of an equitable interest in a trust occurs where a taxpayer transfers a property to a trust and the trustee is instructed to pay all of the income earned by the trust to the taxpayer during the taxpayer's lifetime and, on the death of the taxpayer, to transfer the property to a registered charity. If all the requirements listed below in regards to a "gift" are satisfied at the time of the transfer to the trust, an inter vivos gift of an equitable interest in a trust is considered to have been made at that time. The Department considers a gift to have been made when the transfer of property to the trust has been completed and the equitable interest in the trust has vested in the charity.

A particular donation must qualify as a "gift" in order for the above-noted provisions to apply. For the purposes of these provisions, a gift is a voluntary transfer of real or personal property without valuable consideration. There must be a donor with the capacity to make the gift and there must be a donee to receive the property donated. Where the property donated consists of an equitable interest in a trust, the Department will consider a gift to have been made if all of the following requirements 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.

(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. Also, the gift must be supported by an official donation receipt issued in accordance with Part XXXV of the Income Tax Regulations.

The method of valuing an equitable interest in a trust, whether it be for the purpose of determining the amount of a charitable donation or other tax consequences, will vary according to the type of gift, other interests in the trust and the documentation providing for the gift. The general approach is to value the various interests taking into consideration the fair market value of the property itself, the current interest rates, the life expectancy of any life tenants, or current term certain tables, and any other factors relevant to the specific case. In the case of property other than real property, the longer the period before full ownership of the property is passed to the charity, the more difficult it is to establish its value. In addition, in our view, it would be very difficult to determine the value of an equitable interest in a trust the property of which consisted of shares of a private corporation.

Paragraph 6 of IT-226R states:

"In cases where the size of a residual or equitable interest at the time of the donation cannot reasonably be determined, such as when the life tenant or trustee has the right to encroach on the capital of the trust, no deduction or tax credit in respect of the donation will be allowed."

In ascertaining the value, one would determine what an arm's length person would pay today in order to have the capital of the trust "x" years from now. The appropriate discount rate to use or the "current rate" would be a question of fact in each case, however these rates would approximate market rates for similar risk instruments. These "current rates" would likely be determined by a qualified appraiser or valuation specialist. As indicated in paragraphs 14(f) and (j) of IC-70-6R2, the Department does not usually provide advance income tax rulings on the determination of fair market value or questions of fact.

As a general rule, where a taxpayer disposes of a capital property to an inter vivos trust for the benefit of a charity, the taxpayer is deemed to have received proceeds of disposition equal to the fair market value of the property pursuant to subparagraph 69(1)(b)(ii) of the Act. However, for an individual, if the fair market value of the property at the time of the disposition exceeds its adjusted cost base, the taxpayer or the taxpayer's legal representative, as the case may be, will be eligible to make the election provided under subsection 118.1(6) of the Act. This subsection provides rules allowing for an elected amount, not greater than the fair market value and not less than the adjusted cost base of the capital property, to be considered as both the proceeds of disposition and the amount of the gift. Subsection 110.1(3) of the Act provides a similar election for corporate taxpayer's.

For the purposes of determining the disbursement quota within the meaning of paragraph 149.1(1)(e) of the Act of a charitable foundation, a gift received subject to a trust or direction to the effect that the property given is to be held by the foundation for a period of not less than ten years is to be excluded from the calculation in subparagraph (i) thereof.

We trust that these comments will be of assistance.

Yours truly,

R. Albert for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch

c.c. R.A. Davis Director Charities Division