21 September 1994 External T.I. 9414195 - POOLED FUND REMAINDER INTEREST CHARITABLE 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 a gift to a pooled fund remainder interest charitable trust can be considered a gift to a charity of an equitable interest in a trust.

Position TAKEN:

Can be considered a gift if no encroachment on capital. However, unlikely that a deduction or tax credit in respect of the gift would be allowed.

Reasons FOR POSITION TAKEN:

In cases where property is transferred to a trust under an irrevocable trust agreement, there must be an "iron clad" agreement under which no encroachment can be made of the capital of the trust.

In cases where the size of a residual or equitable interest at the time of the donation cannot reasonably be determined, no deduction or tax credit in respect of the donation will be allowed. It would be very difficult to determine the value of an equitable interest in a trust where the property of the trust consists of various investments.

5-941419
XXXXXXXXXX C. Chouinard

Attention: XXXXXXXXXX

September 21, 1994

Dear Sir:

Re: Pooled Fund Remainder Interest Charitable Trust

We are writing in reply to your letter of June 1, 1994, wherein you requested our comments on the tax status of gifts made to a pooled fund remainder interest charitable trust.

As we understand your proposal, one or more trusts would be set up with, according to the model, one or more beneficiaries. The beneficiaries would be registered charities or qualified donees and the trustees would be a major financial institution. Donations would be made to the trusts and earmarked for a particular beneficiary. According to the terms of the donation, the donor would receive the income from the donation for life and the capital would be transferred to the charity upon the death of the last life interest. The donated funds would go into an investment pool. The donor would receive units of the pool, the number of which would vary with the amount donated. The units would be valued by dividing the total value of the funds of the pool by the number of units outstanding. Donors would be allowed to purchase additional units at the then current value. Each unit would get its pro-rata share of the annual income of the trust. The charities would issue receipts for the discounted value of the transferred property at the time the donation is made to the trust. In the case of a multiple beneficiary trust, the donor would designate the beneficiary when the donation is made and that beneficiary would issue the appropriate receipt.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. The following comments are, therefore, of a general nature only, and are not binding on the Department.

The Department's position with respect to gifts of equitable interests in trusts made to charitable organizations is found in Interpretation Bulletin IT-226R. This Bulletin 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.

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 (i.e., 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.

Based on the information you provided, the donations made to the charitable remainder trusts described would be a gift if the remuneration or fees paid to the financial institution and/or professional managers by the trusts are paid out of the income of the trusts. Should these fees be paid out of the capital of the trusts, we would consider that encroachment is possible and no gift would be considered to have been made to the charity.

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. 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 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. As stated in paragraph 6 of IT-226R:

"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 a person would pay today in order to have the capital of the trust "x" years from now. The appropriate discount rate to use would be a question of fact in each case. However, in our view, it would be very difficult to determine the value of an equitable interest in a trust such as the one you describe, where the property of the trust would consist of various investments.

With respect to subsection 118.1(6) of the Act, this subsection provides rules relating to gifts of capital property or certain real property, allowing for an elected amount, not greater than the fair market value and not less than the adjusted cost base of the property, to be considered as both the proceeds of disposition and the amount of the gift. Since it appears from your letter that the property donated will consist of money, we question your reference to elections under subsection 118.1(6) of the Act.

As regards the capital gains realized by the trust, the trust may, under subsection 104(21) of the Act, designate all or part of the amount of those gains as taxable capital gains of one or more beneficiaries if the beneficiaries may reasonably be considered to have included the designated amounts in their income under either subsection 104(13), 104(14) or section 105 of the Act. Subsection 104(13) of the Act would not apply since the capital gains realized by the trust will enure to the benefit of, but not be payable to, the charities. Subsection 104(14) of the Act would not apply since a charity cannot qualify as a "preferred beneficiary" within the meaning of paragraph 108(1)(g) of the Act. Nor would section 105 apply unless a benefit was conferred on a charity by the trust. Accordingly, in our view, the trust could not designate its realized capital gains in favour of the charities.

Unless as otherwise stated, all references to the Act are to the Income Tax Act, S.C. 1970-71-72, c.63, as amended and consolidated to June 10, 1993.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch

cc.Carl Juneau

Director
Charities Division