The Charitable Remainder Trust (CRT) is a gift planning structure that rarely works in Canada. An import from the U.S. – where it is an integral part of the gift and estate tax regime – the CRT in Canada has fewer tax and planning benefits. It’s a foreign plant that doesn’t thrive in the Canadian soil.
CRTs in the U.S.
Introduced in 1969, U.S. CRTs are a defined structure in the Internal Revenue Code and there are a number of variants. In very simple terms, the U.S. CRT is a tax-exempt inter vivos trust that enables the settlor (donor) to make an irrevocable gift of property, receive annual payments from the trust for life or a term, and name one or more charities as the remainder beneficiary.
The present value of the remainder interest of the trust – a discounted amount typically based on life expectancy of the income beneficiary — is the gift for tax purposes. The cherry on top is that donations of appreciated property to fund a U.S. CRT are exempt from capital gains tax. As most U.S. bequests (gifts by will) produce no tax benefits to the estate, the CRT is a tax-effective alternative.
CRTs in Canada
The Canadian CRT is a different beast. It has the following features:
- Income-only trust with no capital encroachment. Trust expenses are paid from income. In a low-yield environment the income (life) beneficiary is penalized, unlike the U.S. total return trust. The cost and bother of a CRT are often not worth the meager income.
- The CRT produces a donation receipt at inception equal to the present value of the remainder interest, which is the gift portion. Depending on the age of the income beneficiary, this discount can be significant.
- There is a disposition for tax purposes when the CRT is funded with appreciated property, including public securities. By contrast, a direct gift of public securities to charity is exempt from capital gains tax.
- Capital gains within the CRT is taxable. Some Canadian lawyers draft CRTs to assign gains in the trust to the capital beneficiary, which is a tax-exempt charity. CRA has not publicly endorsed this approach.
- Additional capital contributions to the trust are not eligible for a donation tax receipt. Why? Because CRA has taken the position that the charitable gift is the remainder of the trust, not the property contributed.
- Few Canadian charities have experience with CRTs, so they are often more complex to set up, value and track.
- CRTs are irrevocable. They cannot be unwound.
To top it off, unlike the U.S., Canada has no estate taxes, but it does have generous tax incentive for estate donations. A gift by will can be claimed against up to 100% of net income in the final two lifetime returns and up to 75% of net income in up to 5 estate returns. These limits provide greater tax savings than the U.S.
There are, of course, still good reasons to use a CRT. These include privacy, avoiding dependent claims, and handling assets like real estate or private shares. And there has been some creative ways of combining CRTs with Canadian structures like Alter-ego or Joint-Spousal Trusts to improve tax efficiency. But, on balance, CRTs in Canada have more drawbacks than benefits. We have better ways to support charities in an estate plan.