20 March 1998 External T.I. 9732295 - GIFTS BY WILL

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 registered charity by a testamentary trust qualifies as a charitable donation under subsection 118.1 of the Act under the following circumstances:

1) The deceased taxpayer’s will clearly outlines which charities are to receive donations and how much each is to receive. The deceased’s will provides that upon the death of his spouse, the estate is to pay a fixed dollar amount to a registered charity or charities. The surviving spouse has an income interest in the trust and consequently will be entitled to receive all the income earned by the trust annually. The children of the taxpayer have a capital interest in the trust. The trustees cannot encroach on the capital of the trust.

2) Same as (1) except the deceased taxpayer’s will only lists a number of charities who would be entitled to receive donations. The will places a maximum dollar value on the total donations to be made. The trustees have discretion as to how much of a donation is to be made (up to the maximum) and which charities will receive donations.

3) Same as (1) except that the trustees have the power to encroach on the capital of the trust.

4) Same as (2) except that the trustees have the power to encroach on the capital of the trust.

Position:

1) Yes, subsection 118.1(5) would apply and the donation can be claimed on the deceased taxpayer’s individual income tax return pursuant to subsection 118.1(3). When the payment is eventually made to the registered charity after the death of the spouse, the trust cannot claim a non-refundable tax credit for a charitable donation under subsection 118.1(3) on the trust return because the deceased taxpayer is the donor, not the trust.

2) In order for subsection 118.1(5) to apply, the terms of the will must expressly state that a specific gift is to be made to the registered charity. This requirement cannot be met if there is discretion on the part of the trustees as to whether or not a gift will be made to the charity.

When there is a distribution from the capital of the trust to the registered charity at the direction of the trustee, the trust can claim a non-refundable tax credit for the charitable donation under subsection 118.1(3) on the trust return.

3) and 4) 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 trustee has a right to encroach on the capital of the trust, subsection 118.1(5) does not apply. This position is discussed in paragraphs 3 and 6 of IT-226R, Gift to a Charity of a Residual Interest in Real Property or an Equitable Interest in a Trust.

If a donation is made to a registered charity by the trust, the trust can claim a non-refundable tax credit for the charitable donation pursuant to subsection 118.1(3) of the Act on the trust return.

Reasons:

This file is similar to file 973087. XXXXXXXXXX See also files 9304745, 9504917, 72394, 4m06382, 58419, 56232, 73379, 58411, 58573, 57535.

973229
XXXXXXXXXX G. Moore

March 20, 1998

Dear XXXXXXXXXX:

Re: Gifts by Will

This is in reply to your letter of November 14, 1997, requesting our views as to the tax treatment of donations to registered charities made by a trust established under an individual’s will.

You have asked if a trust can claim the amount paid to a registered charity as a donation under section 118.1 of the Income Tax Act (the “Act”) under the following scenarios:

1.The deceased taxpayer’s will outlines which charities are to receive donations and how much each is to receive. The surviving spouse has an income interest in the trust and consequently, will be entitled to receive all of the income earned by the trust annually. The children of the taxpayer have a capital interest in the trust. The deceased taxpayer’s will provides that upon the death of his spouse, the estate is to pay a fixed dollar amount to a registered charity or charities. The trustees cannot encroach on the capital of the trust.

2.Same as (1) above except that the deceased taxpayer’s will only lists a number of charities who would be entitled to receive donations. The will places a maximum dollar value on the total donations to be made. The trustees have discretion as to how much of a donation is to be made and which charities will receive donations.

3. Same as (1) above except that the trustees have the power to encroach on the capital of the trust.

4.Same as (2) above except that the trustees have the power to encroach on the capital of the trust.

Our Comments

Our comments regarding whether the trust can claim the amount paid to a registered charity as a donation under section 118.1 of the Act for each of the scenarios is as follows:

Scenario 1:

In the situation you describe, a gift of an equitable interest is to be made through a testamentary trust and the deceased taxpayer’s will clearly outlines which registered charity is to receive charitable donations and how much each is to receive from the testamentary trust after the death of the spouse. The deceased taxpayer is deemed by subsection 118.1(5) of the Act to have made a gift of an equitable interest in a trust to the registered charity in the taxation year in which the taxpayer died. However, the Department would only consider a gift to have been made in the above circumstances where the fair market value of the gift is readily ascertainable, as outlined in IT-226R, Gift to a Charity of a Residual Interest in Real Property or an Equitable Interest, and where the will does not contain discretionary powers to the trustees for capital encroachment.

Since the deceased taxpayer is considered to be the donor, when the gift is eventually made to the registered charity after the death of the spouse, a non-refundable tax credit for charitable donations is not available to the trust.

Scenario 2:

If a gift is made by a trust to a registered charity at the trustee’s discretion, we are of the opinion that, any payment made by the trust to the registered charity would not qualify, pursuant to subsection 118.1(5) of the Act, as having been made by the deceased in the taxation year in which the deceased died. Subsection 118.1(5) of the Act can only apply where an individual by the individual’s will makes a gift to a qualified donee described in subsection 118.1(1) of the Act. The above words would apply if a specific gift is made to a qualified donee expressly in and by the terms of the will itself without any discretion by trustees; i.e. the qualified donee on reading the will can expect that a specific gift (a specific bequest or a specific device) will be made to it. The discretionary powers of the trustees with respect to the capital of the trust preclude subsection 118.1(5) of the Act from applying. However, if a donation is made from the capital of the trust to a registered charity at the trustee’s discretion, the trust can claim a non-refundable tax credit for the charitable donation pursuant to subsection 118.1(3) of the Act on the trust return.

Scenarios 3 and 4:

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 trustee has a right to encroach on the capital of the trust, it is our view that there is no gift to the registered charity occurring in the taxation year of death of the taxpayer and subsection 118.1(5) of the Act would not apply. This position is discussed in paragraphs 3 and 6 of IT-226R.

If a donation is made to a registered charity by the trust, the trust can claim a non-refundable tax credit for the charitable donation pursuant to subsection 118.1(3) of the Act on the trust return.

We trust our comments will be of assistance to you. Please note, however, that these comments represent our opinion of the law as it applies generally and accordingly, are not binding on the Department.

Yours truly,

J. Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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