All About Estates

Charitable Remainder Trusts – A Capital Idea

Today’s Blog was written by Katie Ionson, Associate at Fasken Martineau DuMoulin LLP

In the right circumstances, charitable remainder trusts (“CRT”s) can be a chance to have your cake and eat it too. CRTs can be testamentary or inter vivos trusts. Generally, the settlor and/or someone close to the settlor (e.g. a spouse) receives income from the trust during his or her lifetime. On the life tenant’s death, the capital of the trust is distributed to charity.

Even though the charity may not receive the actual property for years to come, the CRA considers the gift of the charity’s remainder interest in the trust to be made once the gifted property has been transferred to the trustees. A charitable tax receipt for the value of the remainder interest in the trust can generally be issued at that time. CRTs are therefore an ideal solution for individuals who would like to make a significant gift to charity (and receive a charitable tax credit), but still require income from the gifted property.

The requirements for a valid CRT are set out in now-archived IT-226R. Among other things, for there to be a valid gift of the remainder interest there must be no ability to encroach on the capital of the trust for the life tenant. The CRA takes the position that it is impossible to ascertain the value of the remainder interest where the life tenant has the ability to encroach on capital. Because a charitable tax receipt cannot be issued where the value of a gift is unascertained, capital distributions to the life tenant of a CRT are prohibited.

One question that arose on a file I am working on was whether capital gains could be paid to the life tenant, so long as the initial capital contribution was strictly protected. For example, the trust deed would give the trustees the ability to encroach on capital for the life tenant, provided that the value of the remaining capital never fell below the initial contribution. The value of the initial contribution could be used to calculate the value of the remainder interest, on the assumption that capital gains above this amount would generally be paid out.

This issue was considered in 2001-0086825. The taxpayer proposed a CRT that would allow payment of trust expenses from capital and capital distributions to the life tenant, so long as these payments did not reduce the value of the trust below the value of the initial contribution. Unfortunately, the CRA took the position that these would both be capital encroachments that would prevent the trust from qualifying as a valid CRT. Though the reasoning is fuzzy, the CRA’s conclusion serves as a reminder to draft carefully in creating CRTs to ensure no capital encroachment by the life tenant is possible and to consider in advance how trust expenses will be paid.


About Corina Weigl
Corina Weigl is a partner in the Trusts, Wills, Estates and Charities group at Fasken, a leading international law firm with over 650 lawyers and 9 offices worldwide that offers comprehensive estate planning, estate administration, personal tax planning, charitable giving and estate litigation services. Email: