6 May 1998 External T.I. E9728765 - 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:

Whether a spousal trust can claim a tax credit under section 118.1 in the year the spouse dies?

Position:

Yes, if the cash is actually transferred to the donee. The tax credit can be claimed against the income tax arising from the 21-year rule in 104(4). The trust can choose to treat the as an income beneficiary or claim a tax credit. No 104(6)(b) deduction allowed.

Reasons:

The trust is the donor. Gifts can be made at the trustees’ discretion.

972876
XXXXXXXXXX M. Lemire

Attention: XXXXXXXXXX

May 6, 1998

Dear XXXXXXXXXX:

Re: Technical Interpretation Request

This is in reply to your request for a technical interpretation on the application of section 118.1 and paragraph 104(6)(b) of the Income Tax Act (“the Act”) to a testamentary spousal trust as described in subsection 70(6) of the Act in relation to paragraph 104(4)(a) of the Act. You also requested our comments relating to the taxation of income in a testamentary spousal trust in the taxation year in which the spouse dies where the trust owns shares of a private corporation and where the corporation repurchases its shares after the spouse’s death.

The scenario outlined in your letter appears to be an actual fact situation and written confirmation of the tax implications inherent in factual circumstances should be addressed to your local Tax Services Office.

Consequently, we offer you general comments on a generic scenario as follows:

– Under the terms of Mr. X’s will, a spousal trust (the “trust”) as described in subsection 70(6) of the Act is created.

– The trust is the owner of shares of a private corporation.

– The trustees of the trust have the power to encroach on capital of the trust in favour of Mr. X’s spouse.

– Mr. X’s will also provides the trustees with discretion to make donations (in cash) to registered charities upon the death of his spouse.

– On the day the spouse dies, the trust is deemed to have disposed of its capital property at fair market value pursuant to paragraph 104(4)(a) of the Act.

– After the death of the spouse, the trust continues to exist.

Specifically, you have asked the following questions:

1) Will either Mr. X or the trust be entitled to a tax credit under section 118.1 of the Act if a donation is made by the trustees to a registered charity?

2) Is the trust’s income for the purpose of paragraph 104(6)(b) of the Act in the year in which the spouse dies computed without reference to subsections 104(4), (5), (5.2) of the Act in respect of the day the spouse dies and 107(4) of the Act?

3) Assuming a donation is made in the year in which the spouse dies, can a tax credit under section 118.1 of the Act be claimed by the trust against the income tax arising from income resulting from the deemed disposition of its capital property under paragraph 104(4)(a) of the Act on the day the spouse dies?

4) Can the trust claim a tax credit under section 118.1 of the Act in the year in which the spouse dies if cash is not actually transferred by the end of that year?

5) Assuming the answer to question 4 is “NO”, can the trust treat the registered charity as an income beneficiary and claim a deduction under subsection 104(6) of the Act to reduce its income arising from the deemed disposition of its property under paragraph 104(4)(a) of the Act?

6) Assuming the private corporation is wound up in the year in which the spouse dies or in any of the three years following that year and the shares owned by the trust are redeemed, can any capital loss arising from the redemption of the shares be used to offset the income arising from the deemed disposition of capital property under paragraph 104(4)(a) of the Act?

Our comments

Question 1

If a gift is made by a trust to a registered charity at the trustees’ 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 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 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 will be made to it. In this hypothetical situation above, the discretionary powers of the trustees preclude subsection 118.1(5) of the Act from applying. However, we are of the view that a trust can be entitled to a tax credit under subsection 118.1(3) of the Act when trustees are empowered in or under its terms to make gifts to registered charities with or without limitation on the amount to be given or on the source (income or capital) from which the amount is given.

Question 2

Paragraph 104(6)(b) of the Act generally provides that a trust may deduct, in computing its income, amounts that have become payable or are paid out of the trust income to its beneficiaries. However, we are of the opinion that the deduction under this paragraph does not allow a spousal trust as described above to reduce its income below the amount included in its income by reason of the deemed disposition of properties under subsections 104(4), (5) and (5.2) of the Act on the day the spouse dies and subsection 107(4) of the Act.

Question 3

Assuming that a charitable donation is made in the year in which the spouse dies by the trustees to a registered charity, we are of the view that the trust will be entitled to a the tax credit under subsection 118.1(3) of the Act in that year which could be used to offset the income tax arising from the deemed disposition of capital property under paragraph 104(4)(a) of the Act.

Question 4

For subsection 118.1(3) of the Act to apply in a taxation year, a particular donation must qualify as a gift in that year. As stated in paragraph 3 of Interpretation Bulletin IT-110R3, a gift is a voluntary transfer of property without valuable consideration. Generally, a gift is made if some property (usually cash) is transferred by the donor to a registered charity (the “donee”), the transfer is voluntary and the transfer is made without expectation of return. In this hypothetical situation, it is our view that the property subject to the gift is the cash amount which cannot be viewed as being transferred to the donee until the actual payment is made. Consequently, we are of the opinion that a gift will be made by the trust in the year the spouse dies only if the trustees exercise their discretion, choose the donee and actually pay cash to the donee before the end of that year. Furthermore, it is our view that the trust can claim a tax credit under subsection 118.1(3) of the Act for that year only to the extent that an official receipt containing prescribed information for the gift is filed with the tax return for that year. Finally, it is our opinion that the trustees’ exercise of their discretion should be in writing (e.g. a resolution signed by the trustees, minutes of the trustees’ meeting).

Question 5

Generally, where a specific gift is made out of a trust’s income for a taxation year to a registered charity at the trustees’ discretion, you can choose to treat the registered charity as an income beneficiary under the trust for that year to the extent of the gift or claim a tax credit for the year under subsection 118.1(3) of the Act. However, if the trust is a spousal trust as described in this hypothetical scenario, it is our view that no deduction under paragraph 104(6)(b) of the Act can be claimed for that year to reduce the trust’s income arising from the deemed disposition of capital property under paragraph 104(4)(a) of the Act.

Question 6

We are of the view that the proposed subsections 112(3.2) and (3.3) of the Act could apply in the situation above to reduce the capital loss arising from the redemption of shares that may be claimed by the spousal trust. We are also of the opinion that the capital loss, if any, that would be realized by the spousal trust in the year in which the spouse dies or in any of the three years following that year could be used to offset the income arising from the deemed disposition of capital property under paragraph 104(4)(a) of the Act.

As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, this opinion is not an advance tax ruling and consequently, is not binding on Revenue Canada.

We trust our comments will be of assistance to you.

Yours truly,

Theresa Murphy
Chief
Trusts Section
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch