22 February 1996 External T.I. 9603885 - VALUATION OF INTEREST IN 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.

Principal Issues:

How to determine the value of a gift of an interest in a charitable remainder trust.

Position:

Can use life expectancy tables, but the appropriate discount rate to use is a question of fact in each case.

Reasons:

The discount rate must take the risk element inherent in investments into consideration.

		5-960388
XXXXXXXXXX		C. Chouinard

Attention: XXXXXXXXXX

February 23, 1996

Dear XXXXXXXXXX:

Re: Valuation of Gift of Interest in Charitable Remainder Trust

We are writing in response to your memorandum of August 24, 1995, addressed to A. Margaritis of the Toronto Tax Services Office, which was forwarded to us for reply on January 23, 1996 by the Charities Division. You inquire about the method of valuing a gift of an interest in a charitable remainder trust.

As indicated in paragraph 5 of Interpretation Bulletin IT-226R, a copy of which is enclosed, the method of valuing an equitable interest in a trust for the purpose of determining the amount of a charitable donation 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, 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 cases where the size of a residual or equitable interest at the time of the donation cannot reasonably be determined, such as when a life tenant or trustee has a right to encroach on the capital of the trust, no deduction or tax credit in respect of the donation will be allowed.

The document attached to your memorandum suggests that gifts of an interest in a charitable remainder trust should 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. In our view, the prescribed interest rate would not be an appropriate discount rate in all cases, since it does not take the risk element inherent in certain investments into consideration. Since your query concerns valuation and as valuation issues fall within the responsibility of Valuation Services, we suggest you direct any further queries regarding valuation of gifts of interests in charitable remainder trusts 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

We trust that these comments will be of assistance.

Yours truly,

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