All About Estates

Caution Required: Gift by a Graduated Rate Estate of a Capital Interest in a Residual Trust

The CRA was recently asked to consider whether subsection 118.1(5.1) of the Income Tax Act would apply to a gift made to a qualified donee of a capital interest in a testamentary charitable residual trust.

Subsection 118.1(5.1), if applicable to charitable gift, allows the tax credit in respect of the gift to be claimed by the testator in either or his or her last two taxation years or by testator’s graduated rate estate in the year the donation is made or in any earlier year of the estate (see section 118.1(c)(i)(C) and 118.1(c)(i)(c)). If subsection 118.1(5.1) does not apply to a charitable gift made by an estate, then the credit may only be claimed in the year the donation is made or any of the five following years.

Subsection 118.1(5) will apply to a gift if either: (1) the conditions set on in subsection 118.1(5.2) are met (this provision addresses deemed gifts such as amounts paid due to a beneficiary designation); or (2) the “subject of the gift is property that was acquired by the estate on and as a consequence of the death [of the testator] or is property that was substituted for that property.” (ss. 118.1(5.2)(b)).

The question was therefore whether a capital interest in a residual trust created under an individual’s Will could be considered property acquired by the estate as a consequence of death or property substituted for that property. The CRA concluded that the capital interest in the residual trust could not have been acquired as a consequence of death or substituted for property acquired as a consequence of death. No explanation of their reasoning on this point was provided. As a result, the credit in respect of the gift could only be claimed by the estate in the year the gift was made or the five following years; it could not be claimed by the deceased in either of his or her last two taxation years.

The full text of the letter (in French) can be found by accessing CRA Document No. 2016-0625841E5 F.

About Katie Ionson
Katie Ionson is an Associate at Fasken Wealth Management, Charities and Not-for-Profit Group. As part of her wealth management practice, Katie assists clients with Wills, powers of attorney, trusts, marriage and domestic contracts, and trust and estate administration. She has experience using estate planning to address a variety of client objectives, including income splitting arrangements, asset protection and business succession issues. Katie is engaged in a broad practice in the areas of charities and not-for-profit law, which includes preparing applications for charitable status, assisting clients with transitioning to the new federal or provincial not-for-profit legislation, drafting endowment and gift agreements and advising on administrative and tax-related issues. Email: kionson@fasken.com

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