27 May 1998 External T.I. 9802795 - OUTRIGHT GIFTS AND DEFERRED GIFTS

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. Tax treatment of an outright gift to a charity of appreciated stock.

2. Tax treatment of a deferred gift to a charity using vehicles such as a charitable remainder trust, a charitable annuity trust and a charitable gift annuity.

Position:

Provided general comments based on legislation (including proposed legislation) and Departmental positions as stated in previous correspondence and various Interpretation Bulletins.

Reasons:

See above.

						980279
XXXXXXXXXX 					J. Leigh

May 27, 1998

Dear Sir:

Re: Gifts to Charity

This is in reply to your letter of January 26, 1998 in which you requested information on the Canadian tax treatment of an outright gift of property, such as shares, to a qualified charity as well as a deferred gift to such a charity. You advise that XXXXXXXXXX have expressed a desire to participate in a charitable giving program managed by the university. You also advise that XXXXXXXXXX is a university prescribed by section 3503 of the Income Tax Regulations ("Regulations") for the purposes of paragraph (f) of the definition of "total charitable gifts" in subsection 118.1(1) of the Income Tax Act (the "Act").

The determination of the proper tax consequences relating to any particular situation will depend on an analysis of all the facts, documentation and other information pertaining to the situation. To the extent that you require confirmation of the tax consequences of proposed transactions, your request should be the subject of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R3 (copy enclosed). However, we can provide you with the following general comments which are not binding on the Department.

Proposed legislation

In your letter, you made reference to a proposed amendment to revise the income inclusion rate on capital gains to 37.5% in certain circumstances. We note that Bill C-28, as passed by the House of Commons on April 21, 1998, contains several proposals relating to charitable donations. Some of these proposals may be briefly described as follows:

1. To revise the general annual limit on charitable donations from 50% of the individual's net income plus 50% of any taxable capital gains resulting from the making of the donations to 75% of the individual's net income, 25% of any taxable capital gains resulting from the gifts (to the extent that they were not excluded from the individual's taxable income by the lifetime capital gains exemption in section 110.6 of the Act) plus 25% of any recapture of capital cost allowance included in income as a result of the making of the gifts. This proposed change does not affect the limit for the year of an individual's death or the immediately preceding year, and for gifts of ecologically-sensitive land or Canadian cultural property.

2. To reduce the income inclusion rate on capital gains arising from donations of certain properties after February 18, 1997 and before 2002 to qualified donees to 37.5% from 75%. For this purpose, a qualified donee means any person, other than a private charitable foundation, to whom gifts may be made that qualify for the charitable donations deduction or tax credit. This preferential income inclusion rate will apply to a donation of a share, debt obligation or right listed on a prescribed stock exchange, a share of a mutual fund corporation, a unit of a mutual fund trust, an interest in a related segregated fund trust or a prescribed debt obligation.

Outright gifts

A gift made by an individual to a registered charity or certain other donees may qualify for a charitable donations tax credit against the individual's Part I tax otherwise payable pursuant to subsection 118.1(3) of the Act. For this purpose, a gift may include a gift in kind such as shares. The subject of "gifts in kind" is covered in Interpretation Bulletin IT-297R2 and an explanation of how the charitable donations tax credit is calculated as well as some general comments on the issue of official donation receipts can be found in Interpretation Bulletin IT-110R3.

Pursuant to paragraph 69(1)(b) of the Act, a taxpayer who disposes of property to any person by way of gift inter vivos is deemed to have received proceeds of disposition equal to the fair market value of the property at the time of the gift. Where a taxpayer makes a gift of capital property, the taxpayer will generally realize a capital gain if the fair market value of the capital property exceeds its adjusted cost base. However, in such circumstances, subsection 118.1(6) of the Act allows a taxpayer to designate an amount not greater than the fair market value and not less than the adjusted cost base of the property at the time of the gift. The designated amount is deemed to be the proceeds of disposition and the fair market value of the gift for the purposes of charitable donations tax credit. It is a question of fact whether the property donated is capital property of the taxpayer. Please refer to the enclosed copy of Interpretation Bulletin IT-288R2 for a detailed discussion on the designation under subsection 118.1(6) of the Act.

Deferred gifts

Charitable remainder trust

You describe a situation where a charitable remainder trust is used as a deferred gift vehicle. Essentially, a donor transfers appreciated shares to a trust for the benefit of the university. The shares are held and invested by the trustee. The donor receives income from the trust for his or her lifetime and the university becomes the owner of the investment upon the death of the donor.

The Department's position with respect to a gift of an equitable interest in a trust is found in Interpretation Bulletin IT-226R. As indicated in the bulletin, a gift of an equitable interest in a trust to a registered charity or certain other organizations may qualify for a charitable donations tax credit.

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 (e.g., 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 example of an inter vivos gift of an equitable interest in a trust is when 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.

As stated in paragraph 2 of IT-226R, a particular donation must qualify as a gift in order for section 118.1 of the Act to apply. For this purpose, a gift is a voluntary transfer of property without valuable consideration. 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:

1. There must be 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.

2. The property must vest with the recipient organization at the time of transfer. A gift is vested if:

a) the person or persons entitled to the gift are in existence and are ascertained,

b) the size of the beneficiaries' interests are ascertained; and

c) any conditions attached to the gift are satisfied.

3. The transfer must be irrevocable.

4. 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 shares to a trust, with instructions to the trustee that the dividends and interest earned by the trust be paid to the donor during the donor's lifetime and, on the donor's death, that the shares be transferred to an institution described in subsection 118.1(1) of the Act 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. As stated in paragraph 5 of IT-226R, the method of valuing an equitable interest in a trust, whether it be for the purposes of determining the amount of a charitable donation or other tax consequences, will vary according to the type of gift, other interests in the property or 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. The appropriate discount rate to use would be a question of fact in each case.

Gifts of equitable interests in trust are subject to the same rules regarding deductibility as other gifts. Hence, they must be supported by an official donation receipt issued in accordance with Part XXXV of the Regulations.

Charitable annuity trust

One of the attachments to your letter pertains to a charitable annuity trust. Briefly, it appears that under the arrangement low yield highly appreciated property is transferred into a "living remainder annuity trust". The donor selects an annuity amount or a percent of the initial fair market value which will be paid for one or two lifetimes. The annuity amount will be fixed and will not change regardless of the value of the trust principal or the return of the trust. The annuity amount is paid from income and, if necessary, from principal. After the donor passes away, the trust principal is then distributed to the selected charities.

It appears that a charity annuity trust as described above constitutes an inter vivos trust arrangement with the donor as settlor of the trust. As noted above, in these circumstances Interpretation Bulletin IT-226R indicates that the value of any residual interest gifted to a charity may be used to claim a charitable donations tax credit. However, paragraph 6 of the bulletin states that where a life tenant or trustee has a right to encroach on the capital of the trust, as in the present situation when investment income is less than the annuity amount, no tax credit in respect of the donation will be allowed.

Charitable gift annuity

You also describe a situation where a charitable gift annuity is used as a deferred gift vehicle. Under this arrangement, the gift annuity is a contract between the charity and the individual. Essentially, the individual transfers property, such as shares, to the charity and the charity promises to pay an annuity to the individual for life. Part of the payment is interest earned and part of it is a return of principal. The annuity amount is fixed and will not change regardless of current investment or market conditions. When all annuity payments have been completed, the balance of the value is available to the charity for its charitable purposes.

As noted above, a gift, for the purposes of the charitable donations tax credit, is a voluntary transfer of property without valuable consideration. In the circumstances described, it is our view that the transfer of shares would not constitute a gift because the donor receives as consideration the annuity payments. However, the Department does provide some relief from this position in situations where an individual purchases an annuity from a charitable organization, as defined in subsection 149.1(1) of the Act. As indicated in paragraph 3 of Interpretation Bulletin IT-111R2, where an individual who has an interest in the charitable purposes of a charitable organization pays more for an annuity purchased from the charity than the total amount expected to be received as annuity payments, the Department takes the view that the excess of the purchase price over the amount so expected to be returned is a gift and the individual is entitled to a charitable donation receipt for the excess. However, given our understanding that XXXXXXXXXX is not a charitable organization as defined in subsection 149.1(1) of the Act, it appears that the administrative position would not apply to annuities purchased from the university.

Bill C-28, as mentioned above, includes a proposal to reduce the income inclusion rate on capital gains arising from donations of certain properties to qualified donees. However, given our view that the transfer of shares in the circumstances described above would not constitute a gift, the inclusion rate would be 75% in respect of any capital gain arising on the disposition of the shares that are used to purchase an annuity from a charitable organization.

We have enclosed copies of the various Interpretation Bulletins referred to above for your information.

We trust that the above comments will be of assistance.

Yours truly,

Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
Enclosures