2019-0799641E5 Gift by Life Interest Trust

Principal Issues: Does a trust's "total gifts" for the year in which a beneficiary of the trust dies include the eligible amount of a gift of capital property made in the year immediately following that year?

Position: Yes, variable B of the definition "total gifts" refers to the taxable capital gain (if any) that is in respect of the gift and only to the extent that the eligible amount of the gift is included in the individual’s total charitable gifts for the taxation year.

Reasons: Variable B of the definition "total gifts" refers to the individual's "taxable capital gain for the taxation year in respect of a gift made by the individual in the taxation year (in respect of which gift an eligible amount is included in the individual's total charitable gifts for the taxation year)." However, this does not include any taxable capital gains resulting from the deemed disposition of property by a trust that arises from the death of an individual beneficiary.

Author: Szilagyi, Steven
Section: 104(4), 104(13.4), 118.1

XXXXXXXXXX                                                                          2019-079964
                                                                                                  Steven Szilagyi
January 27, 2020

Dear XXXXXXXXXX:

Re:  Gift by Life Interest Trust

This is in response to your email correspondence of March 7, 2019 involving a gift of non-depreciable capital property by a life-interest trust following the death of the beneficiary of the trust.  We apologize for the delay in responding.

In the hypothetical situation described in your email, the beneficiary of a trust described in subparagraph 104(4)(a)(ii.1) of the Income Tax Act (the Act) dies in a particular year. As a result, the trust is deemed to have disposed of the capital property of the trust for proceeds equal to its fair market value at the end of the day and to have reacquired the property immediately after that day for an amount equal to that fair market value. In addition, under paragraph 104(13.4)(a) of the Act, the trust’s taxation year is deemed to end at the end of the day of the death of the beneficiary (herein referred to as the “Death-Date Year”) and a new taxation year of the trust is deemed to begin immediately after that day (herein referred to as the “Post-Death Year”).  The trust makes a gift of non-depreciable capital property in the Post-Death Year and prior to the trust’s filing-due date for the Death-Date Year.

You note that clause (c)(ii)(C) of the definition of “total charitable gifts” in subsection 118.1(1) allows, in certain circumstances, a gift made by a trust in a subsequent taxation year (e.g., the Post-Death Year) to be included in the total charitable gifts of a trust in the taxation year an individual dies (e.g., the Death-Date Year). However, you also note that variable B of the formula in subparagraph (a)(iii) of the definition “total gifts” in subsection 118.1(1) of the Act refers only to the proportion of an individual’s taxable capital gain for a taxation year in respect of a gift made by the individual in the taxation year (e.g., the Death-Date Year).

In the situation you have described, you have asked whether the trust’s “total gifts” for the Death-Date Year includes the eligible amount of the gift of capital property made in the Post-Death Year.

Our comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R9, Advance Income Tax Rulings and Technical Interpretations.

In general terms, subsection 118.1(1) of the Act defines an individual's “total charitable gifts” for a particular taxation year as the total of the eligible amount of the individual's gifts made in the particular year or any of the five preceding taxation years to qualified donees. In this regard, where the individual is a trust, clause (c)(ii)(C) of the definition of “total charitable gifts” in subsection 118.1(1) of the Act provides that the trust's total charitable gifts for the particular taxation year includes the eligible amount of a gift if

*    the end of the particular taxation year is determined under paragraph 104(13.4)(a) of the Act because of the death of an individual (i.e., a beneficiary under the trust);

*    the gift is made after the particular year and on or before the trust's filing-due date for the particular year; and

*    the subject of the gift is property that the trust held at the time of the individual’s (i.e., beneficiary’s) death, or property substituted for that property.

Pursuant to paragraph (a) of the definition “total gifts” in subsection 118.1(1) of the Act, an individual’s “total gifts” for a taxation year includes the least of the following amounts:

(i)   the individual’s total charitable gifts for the year;

(ii)  the individual’s income for the year where the individual dies in the year or in the following taxation year; and

(iii) in any other case, the lesser of the individual’s income for the year and the amount determined by a formula that includes, among other things, the total of,

A.    75% of variable A, which is described as the individual’s income for the year; and

25% of variable B, which is described as any taxable capital gains in respect of a gift made by the individual in the taxation year (in respect of which gift an eligible amount is included in the individual’s total charitable gifts for the taxation year). In the case where the individual is a trust, (ii) would not be applicable since a trust does not die in the year.

In our view, the variable B taxable capital gain amount refers only to the taxable capital gain (if any) that is in respect of the gift and only to the extent that the eligible amount of the gift is included in the individual’s total charitable gifts for the taxation year. Moreover, the variable B taxable capital gain amount does not include any taxable capital gains resulting from the deemed disposition of property, under subsection 104(4) of the Act, by a trust that arises from the death of an individual beneficiary.

In the situation that you have described, the trust’s total charitable gifts for the Death-Date Year will include the eligible amount of the gift of capital property made by the trust in the Post-Death Year pursuant to clause (c)(ii)(C) of the definition of “total charitable gifts” in subsection 118.1(1) of the Act. In addition, the taxable capital gain, if any, in respect of the gift of capital property made by the trust in the Post-Death Year will be included to determine the variable B amount for purposes of computing the trust’s “total gifts” under subsection 118.1(1) of the Act. However, the Variable B amount does not include the taxable capital gain, if any, from the deemed disposition, under subsection 104(4) of the Act, of the capital property by the trust in the Death-Date Year resulting from the death of the individual beneficiary.

We trust the above comments are of assistance.

Yours truly,

Bob Naufal
Manager
Financial Institutions Section
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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