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.
Principal Issues: 1. where a will provides for a spousal trust with trustee encroachment power plus a specific bequest to be made to charity upon the death of the spouse...will the deceased get a 118.1(5) credit? and If no to 118.1(5), will the spousal trust be entitled to a 118.1(3)credit.when the donation is made upon death of the spouse
Position: 1. question of fact
Reasons: 1. depends completely on wording of will and powers given to the trustees
XXXXXXXXXX
2011-042802
Lena Holloway
613-946-3553
December 14, 2011
Dear XXXXXXXXXX :
Re: Charitable Donation by Will
This is in reply to your email communication dated November 10th, 2011 requesting our comments on the application of subsection 118.1(5) of the Income Tax Act (the "Act"). Your correspondence outlined a hypothetical scenario whereby the will of a deceased taxpayer provides for a spousal trust which includes the right to allow the trustees to encroach on the capital for the benefit of the surviving spouse. This will also provides for a fixed amount donation to a particular named charity to be made upon the death of the surviving spouse.
You have asked whether this donation would give rise to a credit as allowed by 118.1(5) in the final return of the deceased and if not, would the spousal trust be entitled to the donation credit under subsection 118.1(3).
Our Comments:
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an Advance Income Tax Ruling request. However, we can provide you with the following general comments, which we trust will be helpful.
The tax implications of a testamentary gift to a registered charity (or other qualified donee) generally depend upon the terms and conditions of the deceased's will. Where the amount given to registered charity (or other qualified donee) constitutes a gift "by the individual's will" within the meaning of subsection 118.1(5), when the gift is completed it is deemed to have been made, for tax purposes, immediately before the individual died, and a donation tax credit may be claimed in the final T1 return. To the extent that an amount in respect of the gift cannot be claimed that year, the gift is deemed to have been made in the year preceding death. No amount in respect of a gift by the individual's will may be claimed in a T3 return.
Where the terms of a will evidence an intention to create a testamentary trust that is a spouse or common-law partner trust ("a spousal trust"), with a specific amount or assets remaining to be distributed to a registered charity (or other qualified donee) upon the spouse or common-law partner's death, the tax consequences of the charitable gift will depend upon whether the charity is receiving, on the death of the individual, an equitable interest in the spousal trust that would reasonably be regarded as a gift by the individual's will. In general, where the will directs the trustee to make a donation to the charity of a specific property, a specified amount or a specific percentage of the residue, and it is clear from the terms of the will that the trustee is required to make the gift, once completed the gift would likely constitute a gift by the individual's will of an equitable interest in the spousal trust and not a gift of property that could be claimed by the trust.
Where the will reflects a clear donative intent, but the trustee has some degree of discretion respecting the gift it will be a question of fact whether any distribution of property to the charity from the trust is a gift made by the individual's will. For example where encroachment in favour of the spouse is limited to all trust property except the specific amount or particular property to be donated upon death of the spouse, as directed by will, it would be reasonable to conclude that the gift would qualify as a gift under 118.1(5). Such may be the case where the spousal trust provides that the spouse can use a specific property during their lifetime, the property is clearly excluded from a possible capital encroachment by the trustees and upon the spouse's death the charity would receive the property.
Where it is clearly left to the trustees to decide whether or not a gift to a registered charity (or other qualified donee) will be made, and it is clear that the gift was completed after the death of the spouse or common-law partner, it has been the practice of the Canada Revenue Agency to allow a charitable gift to be claimed by the trust. In addition, 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.
Where unrestricted powers of encroachment exist we may accept that a gift has been made by will under 118.1(5) provided that the spouse irrevocably disclaims their interest in the capital (or the specific property) and the trustees undertake not to exercise their authority to make capital (or the specific property) of the trust available for the spouse.
Yours truly,
Phil Kohnen
for Director
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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