All About Estates

Rethinking Testamentary Charitable Remainder Trusts

The tax treatment in Canada of testamentary charitable remainder trusts (CRT) has long been an exercise of metaphysical complexity. Although a charity may receive property from a trust established by will, tax receipts are rare. What looks like a gift isn’t for tax purposes. The new “estate donation” rules in sub-section 118.1(5) that became effective in 2016 have quietly changed this reality, but it may take a while for CRA and the planning community to catch up.

Let me quickly recap 25+ years of CRA rulings, technical letters and interpretation bulletins on the topic.

  1. In 1991, CRA’s interpretation bulletin IT-226 introduced the gift of residual interest (commonly known as a CRT) and provided the conditions when a trust would trigger a tax receipt at inception for present value of the remainder interest.   Per IT-226, CRTs have five requirements, including irrevocable transfer and no capital encroachment (i.e. income only trusts). Structuring a testamentary trust this way meant the testator was the donor, the gift was by will and a tax receipt could be issued and claimed on the final two lifetime returns.   But testamentary CRTs are rare because the testator typically wishes to support a spouse or other beneficiary and income may be insufficient.
  2. The second option is to enable capital encroachment for the life tenant, but to name the charity as a remainder beneficiary.   But this resulted in the “gift” on dissolution of the trust to be treated as a distribution of the trust, not a gift eligible for a tax receipt. Despite the tax effect, this is the most common option.
  3. The third option is for the testator to provide the trustee with discretion to make a gift to a registered charity. Trustee discretion turns the disbursement of the remainder interest into a gift of the trust.  This option is also fairly rare due to the high level of discretion granted to the trustee.

And so we lived with a frustrating result.   Due to legal hair-splitting a gift made with charitable intent that provides material benefit to a charity was not considered to be a gift for tax purposes.

This result has changed with the introduction of the concept of the “estate donation”.   As the name makes clear, an “estate donation” is a donation of the estate, not a gift of the testator. A tax receipt is issued by a charity for the fair market value of the property received from the estate/trust. Much attention has focused on the timing and claim period of the gift under the estate donation rules.   The transfer window is now 60 months after death in order to be claimed on the final two lifetime returns and one or more estate return. Logically, however, a charitable tax receipt may also be issued for distribution by a testamentary trust well after the first 60 months after death.

If my logic is sound, Option 2 above is now eligible for a tax receipt at distribution, Option 1 is still valid and Option 3 may become unnecessary.   I doubt if Income Tax Act requires any further amendments, but it would be helpful for CRA to provide a publication to provide some comfort to donors and their advisors.

About Malcolm Burrows
Malcolm is a philanthropic advisor with 30 years of experience. He is head, philanthropic advisory services at Scotia Wealth Management and founder of Aqueduct Foundation. Views are his own.