16 April 1998 Internal T.I. 9800137 - CHARITABLE DONATIONS

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:

Does the value of an income interest qualify as a gift by will?

Position:

No.

Reasons:

An income interest which only comes into existence after the death of the donor is not the donor's property.

Charlottetown Tax Services Office
Rick Adams
Individual Window Team Leader 7-980013
M. Lemire
Attention: Heather MacNeil
April 16, 1998

Dear Sir\Madam:

Re: XXXXXXXXXX

We are writing in response to your letter of December 24, 1997 in which you requested our comments concerning the application of section 118.1 of the Income Tax Act (“the Act”).

Facts

XXXXXXXXXX

Our Opinion

As explained in paragraph 2 of Interpretation Bulletin IT-226R, “Gift to a Charity of a Residual Interest in Real Property or an Equitable Interest in a Trust”, a gift is a voluntary transfer (i.e. from the owner of the property to the recipient) without valuable consideration. Although a right to income, such as an income interest, is property as defined in subsection 248(1) of the Act, an income interest in a testamentary trust cannot, by definition, be property of the testator as the trust is not established until death. Therefore, the testator cannot transfer, by will, that which is not his property. For this reason, we are of the opinion that subsection 118.1(5) of the Act would not apply to the situation described above. This opinion can be distinguished from the case of O’Brien Estate v. MNR 1991 DTC 1349, in which it is said that an equitable remainder interest in a trust can be a gift under former subsection 110(2.1) (currently 118.1(5)) of the Act. An equitable remainder interest in a testamentary trust differs from an income interest in such a trust in that in the case of the former, the capital element is property of the testator capable of the transfer by will whereas the latter is a mere expectancy or assignment of future income.

Even if an income interest of a trust were considered to be a gift, it is the position of the Department (see paragraphs 2 and 6 of Interpretation Bulletin IT-226R), that where a trustee is empowered to encroach on capital of the trust, no tax credit in respect of the gift is allowed because the size of the donation cannot reasonably be determined. The facts suggest that XXXXXXXXXX intends to relinquish or disclaim any right to encroach on capital of the Trust for the maintenance of the cottage. It is our view that this would not be sufficient to say that the trustees have no power to encroach on capital of the Trust under the terms of the will unless the Trust is varied. Finally, it is the opinion of the taxpayer’s representative that there would be no other power to encroach on capital of the Trust pursuant to the terms of the will. We are of the view that the environmental clause pursuant to paragraph (d) of the will (a copy of it submitted to us) also gives enough power to the trustees under the Trust to encroach on capital of the Trust in the event that they would have to comply with the environmental laws and regulations to prevent any actual or potential environmental problems in connection with any property held in the estate.

Yours truly,

for Director
Resources, Partnerships
and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislative Branch
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