D27. Our charity has been given a "charitable remainder trust". What is it and how is it receipted?

D27. Our charity has been given a "charitable remainder trust". What is it and how is it receipted?


Short answer

Generally, a charitable remainder trust involves transferring property to a trust whereby the donor or beneficiary retains a life or income interest in the trust but an irrevocable gift of the residual interest is made to a registered charity. A charitable remainder trust may be created either through provision in a will (a testamentary trust) or through a living (inter vivos) trust established and effective during the lifetime of the donor. Your charity can issue an official donation receipt for the fair market value of the residual interest at the time that the residual interest vests in your charity.

Long answer

The Canada Revenue Agency will consider a gift of residual interest to have been made if all of the following requirements are met:

  • property is transferred
  • the property must vest with the recipient charity at the time of transfer.

  • A gift is vested if:
    • the person or persons entitled to the gift are alive and their whereabouts is known,
    • the size of the beneficiaries’ interests are ascertained,
      and
    • any conditions attached to the gift are satisfied.

  • the transfer must be irrevocable
    and
  • it must be evident that the recipient organization will eventually receive full ownership and possession of the property transferred.

The method of valuing a residual interest in real property or an equitable interest in a trust, whether for determining the amount of a charitable donation or other tax consequences, will vary according to the type of gift, other interests in the property or trust, and the documentation providing the gift. The general approach is to value the various interests taking into consideration the fair market value of the property itself, the current interest rates, the life expectancy of any life tenants, and any other factors relevant to the specific case. In the case of property other than real property, the longer the period before full ownership of the property is passed to the charity, the more difficult it is to establish its value.

In cases where the size of a residual or equitable interest at the time of the donation cannot reasonably be determined, such as when a life tenant or trustee has a right to encroach on the capital of the trust, no deduction or tax credit in respect of the donation will be allowed.

Example 1
Assume that a trust is created by the will of a taxpayer to hold property gifted by the deceased to a registered charity.

The terms of the will require the trustees to pay all of the income earned by the trust to the taxpayer’s surviving spouse and, on the death of that spouse, to transfer the property to the charity.

Neither the spouse nor any other person has the power to encroach on the capital of the trust.

In this case, a testamentary gift of an equitable interest in a trust is considered to have been made and the taxpayer is deemed to have made a gift of the interest to the charity in the taxation year in which he or she died. Once it is established that a gift has been made, the value of the gift at the time of the transfer must be determined before it can be claimed for income tax purposes.

 

Example 2

Assume a taxpayer transfers a property to a trust and the trustee is instructed to pay all of the income earned by the trust to the taxpayer during the taxpayer's lifetime and, on the death of the taxpayer, to transfer the property to a registered charity.

If all of the requirements listed above were satisfied at the time of the transfer to the trust, an inter vivos gift of an equitable interest in a trust is considered to have been made at that time.

 

Note

Considering the complexity of a charitable remainder trust, your charity is well advised to consult professional help.