A charitable remainder trust is an underutilized philanthropic tool where a charity is given a future monetary benefit, while the donor receives immediate tax relief in respect of the charitable contribution. Typically, a donor irrevocably contributes property to a trust for the lifetime of a beneficiary, with a charity being the residual capital beneficiary upon the death of the lifetime beneficiary.

The lifetime beneficiary has the right to the income of the trust during his or her lifetime. However, there must not be a right to encroach on the capital of the trust until the death of the lifetime beneficiary, at which time the capital must be distributed to or for the benefit of the charity. The reason for this is because if there is a power to encroach on the capital of the trust for the benefit of the lifetime beneficiary, the CRA takes the position that it will be impossible to determine what, if anything, the charity will ultimately receive from the trust, and therefore the issuance of a charitable donation tax receipt at the time that the charitable remainder trust is established is not permissible.

The terms of the trust must provide the charity with a remainder interest in the trust that vests in the charity at the time the property is transferred to the trust. Therefore, the donor cannot include any conditions in the trust that might prevent the charity from receiving the residual property of the trust on the death of the lifetime beneficiary.

Advantage

The donor is entitled to receive an immediate donation tax credit upon the creation of a charitable remainder trust. The charitable donation for donation tax credit purposes is the net present value of the remainder interest in the trust. An actuarial analysis is necessary to determine the value of the charity’s capital remainder interest. This analysis considers various factors, including, the fair market value of the property that is contributed to the trust, the age of the lifetime beneficiary and mortality tables for the lifetime beneficiary. The charity would issue a donation receipt for the fair market value of the residual interest at the time the property is transferred to the trust. This enables the donor to offset his or her income in the year of the transfer and/or his or her income in any of the following 5 years.

Disadvantages

Although charitable remainder trusts may be advantageous for receiving an immediate donation tax credit, there may be several disadvantages to consider. For example:

•   If the donor transfers new property to the trust after the initial transfer for which he or she received the charitable donation tax receipt, no additional charitable donation tax receipt can be issued, as no new gift is considered to be made to the charity. Instead, the value of the existing remainder interest is merely enhanced.

•   Subject to certain exceptions, such as a transfer to a qualifying spousal trust, alter ego trust or joint partner trust, transferring property into a trust with significant appreciated capital gains will trigger a disposition for income tax purposes which is taxable to the transferor.

•   As a result of the graduated rate estate (“GRE”) regime, the CRA takes the administrative position that where a Will establishes a trust and gifts the remainder interest in the trust to a charity, the gift will not qualify as a gift by a GRE.[2] In order for a gift to qualify as a donation from a GRE, the gifted property must have been owned by the deceased on his or her death. However, the subject of the gift in a charitable remainder trust is the equitable interest in the trust, which equitable interest was not acquired by the estate on and as a consequence of the death of the testator. Therefore, no donation tax credit can be claimed in the year of death of the testator or the year preceding the year of death of the testator.

Setting up a charitable remainder trust requires a good understanding of its requirements and should be established with the assistance of an advisor.

[1] This blog was adapted from my article in the Spring 2019 Jewish Foundation of Greater Toronto’s Giving Advice e-newsletter, “Tips and Traps of Charitable Remainder Trusts”.

[2] Canada Revenue Agency Views, Interpretation 2016-0625841E5 – Gift of equitable interest in a trust.