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: Can a spousal trust claim a tax credit under subsection 118.1(3) of the Act to offset the income tax arising on death of the spouse when the terms of the will provide that the remaining assets of the trust are to be given to a registered charity on death of the spouse but the trustees have the power to encroach on capital of the trust?
Position: Yes.
Reasons: Subsection 118.1(5) does not apply pursuant to paragraph 6 of IT-226R because of the power to encroach on capital. The trust is making a gift pursuant to paragraph 3 of IT-226R when trust property distributed to a charity. The distribution by the trust to the charity constitutes a “voluntary transfer” as the power to encroach on capital gives the trustees discretion not to distribute any of the trust assets to any charity. Consistent with the T3 Guide and previous technical interpretations. XXXXXXXXXX . Consistent with Finance’s policy which is to encourage gifts to charities.
February 11, 1999
Headquarters Headquarters
Charities Division Trusts Section
M. Lemire
Attention: Mark Heyendal
7-981178
Charitable Donation Made by a Testamentary Spousal Trust
This is in reply to your May 6, 1998 facsimile in which you request our opinion as to whether a testamentary spousal trust (the “spousal trust” thereafter) can claim a tax credit under subsection 118.1(3) of the Act when the terms of the will provide that the remaining assets of the trust are to be transferred to a charity (specified or not) on the spouse’s death but there is a power to encroach on capital of the trust in favour of the spouse while alive. We apologize for the delay in response.
Where the terms of the will clearly outline which charities are to receive donations, how much each of them is to receive and there is no power to encroach on capital, subsection 118.1(5) of the Act would generally apply so that the donation would be viewed as a “gift by will” and claimed on the deceased taxpayer’s individual income tax return pursuant to subsection 118.1(3) of the Act. Where the donation is viewed as a gift by will, it is our view that the trust can not claim a tax credit at any time under subsection 118.1(3) of the Act on the trust’s income tax return as the trust is not making a “gift” pursuant to paragraph 3 of IT-226R.
In the scenario described in your facsimile, it is our opinion that subsection 118.1(5) of the Act would not apply in accordance with paragraph 6 of IT-226R as the trustees of the spousal trust have a right to encroach on capital for the benefit of the spouse while she is alive. However, in such case, it is our view that the spousal trust would be entitled to claim a tax credit under subsection 118.1(3) of the Act when trust property is transferred to a charity. Therefore, for a tax credit to be claimed under subsection 118.1(3) of the Act by the spousal trust in the taxation year the spouse dies, it is also our view that trust property would have to be transferred by the spousal trust to the charity before the end of the year.
For your information a copy of this letter will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department’s mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer.
Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613-957-0682. The severed copy will be sent to you for delivery to the client.
We trust our comments will be of assistance to you.
Theresa Murphy
Manager
Trusts Section
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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