5 October 1994 External T.I. 9421645 - GIFT OF EQUITABLE INTEREST IN A 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 gift can be made to hospital where donor retains right to receive income generated by gift during donor's lifetime.

Position TAKEN:

If structured as a gift of an equitable interest, gift acceptable.

Reasons FOR POSITION TAKEN:

Department has recognized validity of gifts of equitable interests in trusts.

XXXXXXXXXX 5-942164
C. Chouinard

October 5, 1994

Dear XXXXXXXXXX:

Re: Gift to a Charity of an Equitable Interest in a Trust

We are writing in response to your letter of August 17, 1994 regarding the above-mentioned matter.

The Department's position with respect to gifts of equitable interests in trusts made to charitable organizations is found in Interpretation Bulletin IT-226R, a copy of which is enclosed. 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 118.1(1) of the Income Tax Act (the "Act")) may qualify as a federal tax credit which can be deducted against taxes payable.

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.

Therefore, if the above conditions are met, a transfer of stocks and bonds to a trust, with instructions to the trustee that the dividends and interest earned by the trust be paid to yourself during your lifetime and, on your death, that the stocks and bonds be transferred to the XXXXXXXXXX would qualify as an inter vivos gift of an equitable interest.

However, 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.

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, the property of which consisted of shares.

Gifts of equitable interests in trusts are subject to the same rules regarding deductibility as other gifts. Thus, they must be supported by an official donation receipt and the amount that can be claimed as a tax credit in respect thereof is the lesser of the amount of the gift and 20% of the individual's income for the year, unless the gift is made to Her Majesty in right of Canada or a province, or constitutes a cultural gift. Since the XXXXXXXXXX is likely a registered charity, any gift thereto would be subject to the 20% rule mentioned above.

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