7 March 1991 Income Tax Severed Letter - Receipting of Gifts of Residual Interest

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.

Dear Sirs:

Re: Receipting of Residual Interest

This letter is in reply to your request of January 18, 1991, and further to your letter of February 15, 1991, concerning the possible tax receipts being issued for gifts of residual interest. The hypothetical facts given are as follows:

A 78 year old male owns $50,000 worth of 20 year Bank of Canada Bonds bearing 11% interest. He bought them at face value and they are still worth their face value. He wishes to give them to the University with the understanding that the bonds be lodged with a trust company. He is to receive interest income on the bonds until his death and then the bonds become property of the University. He will receive a T5 each year, report the income on his tax return and pay the appropriate income tax.

In your view, this man is presently entitled to a tax receipt for $18,644. This figure is arrived at by computing the Present Value of the $5,500 income he will receive over his estimated lifetime (10.3 years) which comes to $31,356. When you deduct this Present Value amount from the $50,000 worth of bonds, you arrive at $18,644.

Our Comments

The Department's administrative position with respect to gifts of residual interests made to charitable organizations is found in Interpretation Bulletin IT-226 (copy enclosed). Essentially, a "gift", eligible for tax credit treatment, is considered to have been made:

• i) in circumstances where the gift vests at the time of the giving of the gift, and
• ii) where the value of the residual interest is reasonably ascertainable.

The Department interprets vesting, in the context of IT-226, to have occurred when a person obtains a right to absolute ownership of a property so that this right cannot be defeated by any future event, even though that person may not be entitled to the immediate enjoyment of all benefits from that right. The transfer must be irrevocable.

The valuation of the residual interest for the purposes of determining the amount of the charitable donation and the resultant capital gain or loss will vary according to the type of gift, the interest retained and the wording of the document that sets out the gift. The general approach will be to value the life interest or other interest retained, using the present fair market value of the whole property, current interest rates and the life expectancy of the life tenant, or current term certain tables, and to deduct this amount from the total value to arrive at the residual interest.

In this respect, when property is considered to vest it must in all cases vest indefeasibly. In cases where property is transferred to a trust under an irrevocable trust agreement, they must be "iron clad" agreements under which no encroachment could be made on the capital of the trust. Where a taxpayer transfers a property to a trust and the trustee is instructed to pay all 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 and provided all the other requirements have been satisfied at the time of transfer, an inter vivos gift is considered to have been made at that time. It is not clear to us whether these conditions would be met by the hypothetical facts in your situation. Where encroachment is possible under the arrangement referred to above, no gift would be considered made to the charity.

Finally, we should note that it is our view that gifts of residual interests are possible only with real property or the capital interest in a trust. We assumed for purposes of our reply that, in your hypothetical situation, the donor would be using the trust company as the Trustee of a trust and not merely as custodian of the securities.

We caution that our replies are not advance income tax rulings but are merely opinions based solely on the information given. These opinions might very well change upon a review of all of the facts and particularly after an examination of all pertinent documentation. Where a particular fact situation exists and proposed transactions are involved we suggest you seek an advance income tax ruling pursuant to the guidelines in Information Circular 70-6R.

We trust our comments will be of assistance to you.