2022-0943881E5 Charitable Remainder Trusts

Principal Issues: An individual transfers property to a charitable remainder trust (CRT) and gifts an equitable interest in the trust to a qualified donee. Is the individual eligible to include the amount of the taxable capital gain realized on the transfer of the property to the CRT in Variable B of the definition “total gifts” in subsection 118.1(1)?

Position: The realized taxable capital gain on the transfer of the property to the CRT is not eligible for inclusion of Variable B.

Reasons: The property that is the subject of the gift referenced in Variable B is the equitable interest in the trust, not the property being settled in the trust.

Author: Szilagyi, Steven
Section: 118.1(1)

XXXXXXXXXX                                                                   2022-094388
                                                                                          Steven Szilagyi

March 10, 2023

Dear XXXXXXXXXX,

Re: Charitable Remainder Trusts

We are writing in response to your emails dated July 21, 2022 and September 16, 2022 regarding charitable remainder trusts (CRTs) and our discussion on February 7, 2023 (Szilagyi/Naufal/XXXXXXXXXX). You describe, in your emails, that an individual settles and transfers a capital property to a CRT and gifts an equitable interest in the CRT to a qualified donee that is a registered charity, the eligible amount of which is included in the individual’s “total charitable gifts” under subsection 118.1(1) of the Income Tax Act (Act). You have asked whether the individual is eligible to include the taxable capital gain, arising from the transfer of the capital property to the CRT, in variable B of the definition “total gifts” in subsection 118.1(1) of the Act.

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 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

CRTs are not an entity specifically dealt with under the Act. It is a widely used term for a trust structure (testamentary or inter-vivos) in which a qualified donee has an interest. In most situations, a property is settled in a trust, with the donor retaining an income interest in the trust, and the qualified donee being given the residual interest in the trust. It is our longstanding view that where a capital property is transferred to a trust and a qualified donee is given an equitable interest in the trust such that they are entitled to receive the capital property held in the trust at a time when there are no further income beneficiaries, a gift may have been made by the settlor of the trust to the qualified donee. The property which we consider to have been gifted to the qualified donee is not the capital property actually transferred to the trust by the settlor, but rather the equitable interest in the trust. The trust has received the capital property. The qualified donee has received an equitable interest in the trust.

Moreover, in order for a gift of an equitable interest in a trust to have been considered to have been made to a qualified donee, the transfer of property to the trust to satisfy the qualified donee's capital interest must be irrevocable and the right of the qualified donee to receive the property held by the trust at a future date must vest, such that the right may not be taken away from the qualified donee at a future date.

A taxpayer’s “total gifts” for a taxation year is computed by reference to the taxpayer’s “total charitable gifts”, “total cultural gifts” and “total ecological gifts” as these terms are defined in subsection 118.1(1) of the Act. In this regard, paragraph (a) of the definition “total gifts” 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, described as the individual's income for the year; and

B. 25% of variable B, described as the taxable capital gain 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 situation described, given our longstanding view that the property gifted by the individual to the qualified donee (e.g., the registered charity) is an equitable interest in a CRT (the eligible amount of which is included in the individual’s total charitable gifts), it would follow that the taxable capital gain referred to in Variable B is in respect of the gift of that equitable interest made to the qualified donee. The individual’s taxable capital gain arising from the transfer of the capital property to the CRT would not be included in variable B of paragraph (a) of the definition of “total gifts” in subsection 118.1(1) of the Act.  

We trust our comments will be of assistance.

Yours truly,

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

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