26 January 1995 External T.I. 9429135 - POOLED FUND REMAINDER INTEREST CHARITABLE TRUSTS

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:

1.Whether a gift of an equitable interest in a trust, the property of which would consist of various investments, can be valued using the prescribed interest rate and life expectancy tables.

2.Whether the capital gains realized by the pooled fund remainder interest trust could be designated in favour of the capital beneficiaries, i.e., the charities, where the charities would be issued units giving them the right to receive the capital gains realized by the trust.

Position TAKEN:

1.Although life expectancy tables are acceptable, the prescribed interest rate is not an acceptable criteria to establish the value of a remainder interest.

2.If the trust deed provides that capital gains are paid or payable to the beneficiaries, a designation can be made in favour of the beneficiaries.

Reasons FOR POSITION TAKEN:

1.The prescribed interest rate would not be an appropriate discount rate since it would not approximate the rates for similar risk instruments.

2.A designation can be made under subsection 104(21) of the Income Tax Act if the capital gains realized by a trust are paid or payable to the beneficiaries.

			5-942913
XXXXXXXXXX	C. Chouinard

Attention: XXXXXXXXXX

January 26, 1995

Dear Sir:

Re: Pooled Fund Remainder Interest Charitable Trust

We are writing further to our meeting (XXXXXXXXXX/Albert/Chouinard) of November 28, 1994, during which we discussed two issues regarding pooled fund remainder interest charitable trusts, namely, the valuation of an equitable interest in such a trust and the possibility of designating capital gains realized by such a trust in favour of the capital beneficiaries, that is, the charities.

As we indicated in our letter of September 21, 1994, the valuation of an equitable interest in a trust for the purpose of determining the amount of the charitable donation will vary according to the type of gift, the interest retained and the wording of the document that sets out the gift. The general approach is to value the life interest or other interest retained, using the present fair market value of the whole property, an appropriate discount rate and the life expectancy of the life tenant, or current term certain tables, and to deduct this amount from the total value to arrive at the residual interest.

You have proposed that gifts made to a pooled fund remainder interest charitable trust be valued using the prescribed interest rate and life expectancy tables. Although the life expectancy of a life tenant could be established using life expectancy tables, the appropriate discount rate to use is a question of fact in each case and it should approximate the rates for similar risk instruments. We have discussed the valuation issue with the Department's Valuation Services and they have indicated that the prescribed interest rate would not be an appropriate discount rate, since it does not take the risk element inherent in most investments into consideration. Since valuation issues fall within the responsibility of Valuation Services, we suggest you direct any further queries regarding valuation of gifts made to a pooled fund remainder interest charitable trust to Elizabeth Shultis, at the following address:

Audit Directorate
Audit Technical Support Division
Valuation Services
MacDonald Building
123 Slater Street, Room 801
Ottawa, Ontario
K1A 0L8

As regards the designation of capital gains realized by the trust in favour of the capital beneficiaries, namely the charities, we cannot determine whether a designation could be made in favour of the charities without knowing more about the terms of the trust deed. However, if the trust deed made clear that any capital gains realized by the trust will be paid or are payable to the charities, a designation under subsection 104(21) of the Income Tax Act could be made in favour of the charities.

We trust that these comments will be of assistance, however, we caution that they do not constitute an advance income tax ruling and are, accordingly, not binding upon the Department with respect to any particular transaction.

Yours truly,

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

cc.Elizabeth Shultis

Valuation Services