1 December 1999 External T.I. 9918215 - GIFTS BY WILL OR ESTATE

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. What constitutes a "gift by will" for purposes of subsection 118.1(5) of the Act.

2. Where a will stipulates that a donation be made to specified charities for specific percentages of the residual of the estate, but the amount of the "residual" depends upon certain discretionary actions of trustees with respect to tax elections does ss.118.1(5) apply to the deceased or ss.118.1(3) apply to estate.

3. Where a will stipulates that a gift is to be made to one several specified charities in an amount that is within a dollar range, would ss. 118.1(5) apply to deceased or ss.118.1(3) apply to the estate. Also, if a non-depreciable capital property is donated, would ss.107(2) apply.

4. When does ss.118.1(3) apply and when does ss.104(6) apply when trustees make a payment to a charity, out of the income of a trust?

5. When does ss.118.1(3) apply and when does ss.107(2) apply when trustees make distributions from an inter-vivos trust which lists charities as discretionary capital beneficiaries.

Position

1. Question of fact.

2. Generally, ss.118.1(5) would apply to deceased, provided actions of trustees and computation of residual are reasonable and in accordance with the terms of the will and provided no person has a discretionary right to encroach on capital of the estate.

3. If the charity is not specified, ss.118.1(5) will not apply. If charity is specified in the will, ss.118.1(5) would generally apply with respect to the minimum amount stipulated in the will. Any donation in excess of the minimum would generally be a tax credit to the estate under ss.118.1(3). Ss.107(2) will generally apply where non-depreciable capital property is transferred to a charity in satisfaction of a capital interest in estate that was created by the decision ( by will or by trustees) to make a donation to the charity. It is noted that the issue of the charity needing to be specifically named in the will is under consultation XXXXXXXXXX .

4. Whether the distribution to the charity is a payment in satisfaction of the charity's income interest in the estate and is therefore eligible for a deduction under ss.104(6), or whether the distribution is a charitable donation eligible for a tax credit under ss.118.1(3), is a question of fact that depends upon the wording in the will and the intentions of the trustees in making the distribution.

5. As in (4), question of fact to be determined based upon the wording in the trust agreement and intentions of trustees in making the distribution to the charity.

Reasons:

1. It is a question of fact whether a particular transfer or designation in a will that property is to be transferred to a charitable organization is a gift at law. A determination could only be made after a thorough review of all relevant documents.

2. Previous positions - if charity to receive the gift is not specified in the will, then not a gift by will. Where terms of will are clear as to charity to receive donation and actions to be taken by trustees in arriving at the amount of the donation (i.e. the residual), generally, the trustees discretion with respect to the use of permissive tax elections not considered sufficient to disallow tax credit from coming under ss.118.1(5)

3. The donation of the minimum would come within the previous positions taken with respect to the intent of ss.118.1(5), and the excess is clearly a decision made by the trustees to make a donation from the estate and therefore ss. 118.1(3) should apply. Also, wording of ss.107(2).

4. Question of fact.

5. Question of fact.

XXXXXXXXXX 		991821

Attention: XXXXXXXXXX

December 1, 1999

Dear Sirs:

Re: Subsection 118.1(5) - Charitable Gifts by Will

This letter is in reply to your letter of June 29, 1999, requesting our views as to the application of subsections 118.1(5), 118.1(3), 104(6) and 107(2) of the Income Tax Act (Canada) as they relate to gifts provided for in a taxpayer's will or that are made by the trustees of the deceased taxpayer's estate (the "Estate"). We do apologize for the delay in our response.

It would appear that some of the facts outlined in your letter relate to actual proposed transactions involving particular taxpayers. A binding determination from the Canada Customs and Revenue Agency ("CCRA") regarding the applicability or inapplicability of any provision of the Act can only be obtained by way of an advance income tax ruling request following the procedures outlined in Information Circular IC-70-6R3. We do however provide you with the following general comments in connection with your request which we hope will be of assistance to you.

Subsection 118.1(5) provides that where a taxpayer, by his or her will, has made a gift to a qualified donee, the donation will be deemed to have been made immediately before the death of the taxpayer. With respect to whether or not a taxpayer will be considered to have made a gift "by will", for the purposes of subsection 118.1(5), our view is that the following criteria must be satisfied:

a) it is clear that the deceased taxpayer intended to make gifts to specific qualified donees, which are named in the will,

b) the amount of the donation to be made to each charity is stipulated as a specific amount, a specific property or a percentage of the residual of the deceased's Estate,

c) the will clearly specifies what is to be paid from the Estate in determining the amount of any residual,

d) the will does not provide for discretionary encroachments on capital, and

e) there must be a "gift" at law.

As stated in Interpretation Bulletin IT-110R3 a gift is considered to have been made where there is a voluntary transfer of property by a donor to a qualified donee and the transfer is made without expectation of return. Whether or not there has been a "gift" at law is a question which can only be answered after a thorough examination of all the relevant facts of a specific situation.

With respect to the use of a formula in a will, which provides for the amount to be donated to qualified donee(s), we are unable to provide comments on the appropriateness of any specific calculations used to determine the residual of the Estate. We would comment however, that provided the calculations used are reasonable and consistent with the wording of the will, where the will provides that the trustees are to pay for specific debts and expenses from the Estate, it is our view the fact that a calculation is used to determine the specific dollar amount of a donation would not deny the application of subsection 118.1(5). We are also of the view that the decision of the trustees as to whether to use elections, which are permitted under the Act, in determining the amount of taxes payable by the deceased, will not, in and by itself deny the application of subsection 118.1(5).

Your letter raised the issue as to whether a donation would be considered to have been made by will for purposes of subsection 118.1(5), where the deceased's will provides that a donation is made to one of five charities and the amount is to be within a dollar range. It is our current view that in such a situation there would not be a gift "by will" for purposes of subsection 118.1(5), because the trustees have discretion with respect to which of the five charities is to receive the donation and, although there is a stipulated dollar range, the actual amount to be donated is determined by the trustees. In our view this situation would generally result in a donation tax credit being available to the Estate pursuant to subsection 118.1(3). We would note that in a situation where the charity to receive the gift was not left to the discretion of the trustees and a dollar range for the amount of the gift was provided for in the deceased's will, we would generally be of the view that the deceased would be entitled to a donation tax credit under subsection 118.1(5) for the minimum amount of the range, with the Estate being entitled to a credit under subsection 118.1(3) in respect of any amount of the donation in excess of the minimum stipulated in the will. This is because the donation of any amount above the minimum would be purely at the discretion of the trustee. Our position with respect to the disallowance of a tax credit under subsection 118.1(5) where the specific charity to receive the gift is not specifically named in the will, but it is clear that the trustee is required to make a gift of a specific amount to charities under the instruction in the will, is currently under review.

Your letter further raised questions as to the application of subsection 107(2) on the distribution of non-depreciable capital property by an Estate to a charity. Subsection 107(2), generally applies where a distribution is made to a Canadian resident beneficiary of a trust (including a testamentary trust), in satisfaction of all or part of that beneficiary's capital interest in the trust. Therefore, when non-depreciable capital property is distributed by the Estate to a Canadian resident charity in satisfaction of the gift under the will, it is our view that subsection 107(2) would generally apply.

Your letter also raised the issue as to the application of subsections 104(6) and 118.1(3) where a specified charity is named as a discretionary income beneficiary of a testamentary trust. Assuming the terms of the will give the trustees discretionary powers to make donations to charities, in our view, it is a question of fact to be determined based on the specific wording of the will and the intentions of the trustees at the time a distribution is made to a charity, whether the payment of amounts to a registered charity by a testamentary trust represent a distribution out of income to a beneficiary of the trust, and therefore fall within the scope of subsection 104(6), or are a charitable donation made by the trust for which a tax credit under subsection 118.1(3) may be claimed by the Estate.

With respect to inter-vivos trust arrangements, your letter raised questions as to the application of subsections 118.1(3) and 107(2) on the distribution of capital property of the trust to discretionary capital beneficiaries. Again, we assume that the terms of the trust provide the trustees with the discretion to make charitable gifts. Based on this assumption, and as indicated above, with respect to the application of subsections 118.1(3) and 104(6), on the distribution of income from a trust to a charity at the discretion of the trustees of the trust, this is a question of fact which depends upon the specific wording of the trust agreement and the intentions of the trustees in making the distribution to the charity. It must be determined whether the intention of the trustee was to have the trust make a distribution to the charity as a donation of capital property of the trust, or in settlement of a capital interest which the charity may have in the trust. Where the facts indicate that the trust has distributed any non-depreciable capital property to a charity, in settlement of a capital interest that the charity is considered to have in the trust, subsection 107(2) would generally apply. If however, the facts suggest that the capital property of the trust was given to the charity as a gift, and not in settlement of any capital interest of the charity in the trust, then subsection 118.1(3) would generally apply.

The foregoing comments represent our general view with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R3, the above comments do not constitute an income tax ruling and accordingly are not binding on the CCRA. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.

Yours truly,

Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate