A charitable remainder trust (CRT), although not widely used in Canada, can be a useful charitable giving tool that generates an immediate tax credit for the donor.

In an inter vivos context, an individual establishes an alter ego trust and transfers property to the trust on a tax-deferred basis. The trust holds the property for the benefit of the individual during the individual’s lifetime, entitling the individual to the trust’s income but not to the trust’s capital. Instead, the designated charity is the capital beneficiary and is entitled to receive the property after the individual dies. The charity’s interest is referred to as a residual interest, and the trust issues a charitable donation receipt to the individual for the value of the residual interest at the time of the transfer to the trust. The individual can use the charitable donation tax credit to shelter income in the year the property is donated.

In a testamentary trust context, CRTs are more complex. Specifically, as of 2016, a charitable donation made by an individual through a will (i.e., a testamentary trust) is deemed to have been made by the estate. As a result, the donation tax credit is for the estate and not the deceased, meaning it cannot be used to shelter income on the deceased’s terminal return. There are exceptions to this rule if the estate is a Graduated Rate Estate (GRE), but the Canada Revenue Agency (CRA) has released views that provide that a testamentary CRT is not considered a donation by a GRE, thereby restricting the donation tax credit to the estate.

Do consider this option as part of your overall estate plan to reduce income tax on death.

Today’s blog content is taken from content published by the National Tax Office of RSM Canada LLP. The advice is general in nature – consult your tax and financial adviser for specific advice.