At the National Convention of STEP held in Toronto in June of this year, there was a roundtable with the CRA and one of the questions will have importance to some planners with regard to donations for an alter ego trust to a charity. This is always a highly technical issue and we are reproducing the full question and answer as any attempt to summarize may cause readers to miss some of the nuances.
“An alter ego trust owns a portfolio of publicly traded securities which have appreciated in value. The Settlor (Contributor) to the alter ego trust dies and the alter ego trust has a deemed year-end at the end of the day on which the individual dies pursuant to subsection 104(13.4). The trust realizes a capital gain at that time pursuant to subsection 104(4).
a.) Assume that the residual beneficiary, after the death of the Contributor, is registered charity, and a distribution is made to that registered charity. In these circumstances, can the alter ego trust claim the amount as charitable gift that is eligible for the donation tax credit?
b.) Assume that the residual beneficiaries are a class of registered charities as determined by the trustees, and that the trustees may make payments over a period of time, say the next 3 years, to those various registered charities. At the end of 3 years, the capital remaining is to be distributed to registered charities. In these circumstances, can a charitable donation be claimed by the alter ego trust?
c.) If the donation by the alter ego trust is made by donating the publicly traded securities, is the taxable capital gain nil as would be the case for an individual?
a.) When the settlor of an alter ego trust dies, the trust has a deemed year-end at the end of the day on which the death occurs pursuant to subsection 104(13.4). In the situation described above, the trust realizes a capital gain at that time pursuant to subsection 104(4). Clause (c)(ii)(C) of the definition of “total charitable gifts” in subsection 118.1(1) was added to the Income Tax Act, applicable for taxation years after 2015, to allow for the inclusion, in the trust’s total charitable gifts, of the eligible amount of a gift made by the trust in a shortened taxation year as a result of a deemed year-end triggered by paragraph 104(13.4)(a). As such, based on the situation described above, it is our understanding that the trust would like to claim a donation tax credit to offset the capital gain that occurs in the trust’s taxation year in which the Contributor dies.
Under common law, “a gift is a voluntary transfer of property owned by a donor to a donee, in return for which no benefit or consideration flows to the donor” (The Queen v Friedberg,  1 CTC, 92 DTC 6031 (FCA)). Generally, for purposes of sections 110.1 and 118.1, a gift under common law is made if a taxpayer has donative intent, and all three of the following conditions are satisfied:
- there must be a voluntary transfer of property to a qualified donee;
- the property transferred must be owned by the donor; and
- no benefit or consideration must flow to the donor.
In a situation where an alter ego trust makes a payment to a registered charity, it is a mixed question of fact and law whether the payment is a charitable gift by the trust that is eligible for a donation tax credit pursuant to subsection 118.1(3), or a distribution of income or capital to a beneficiary of the trust. The determination depends upon the specific wording of the trust agreement and the intentions of the trustee in making the payment to the charity.
Where the facts lead to a determination that the trustee has no discretion as to whether the payment is made to the charity, the CRA would not consider the payment to qualify as a gift. Consequently, the payment by the trust would not be eligible for the donation tax credit.
On the other hand, the CRA has accepted that, where the facts lead to a determination that the trustees is clearly given the discretion to decide if a payment is to be made to a charity or to have the funds used in some other manner, the payment is considered voluntary. Accordingly, the payment by the trust to the charity would be considered a charitable gift that is eligible for the donation tax credit provided that the other conditions of the subsection are satisfied.
b.) The comments provided in response (a) above are also applicable to this example. Where a trust makes a payment to a charity, it is a mixed question of fact and law whether the payment is a charitable gift by the trust that is eligible for a donation tax credit pursuant to subsection 118.1(3), or a distribution of capital or income to a beneficiary of the trust.
In the situation described above, the trustee “may” make payments over the next three years. This suggests that the trustee may have discretion and that the payments may be voluntary. Accordingly, the payments by the trust to the charities over the three years may be eligible for the donation tax credit provided that the other conditions of the subsection are satisfied.
Once the three years has passed, the capital remaining is to be distributed to charities. This wording suggests that the trustee may not have discretion with regard to this payment and as such, the payment by the trust may not be eligible for the donation tax credit.
c.) In part, subparagraph 38(a.1)(i) provides that a taxpayer’s taxable capital gain for a taxation year from the disposition of a property is equal to zero if the disposition is the making of a gift to a qualified donee of certain publicly-traded securities as described therein.
As noted in responses (a) and (b) above, whether a payment to a charity is a gift is a question of fact. However, in this example, if the facts lead to a determination that the disposition of the property from the alter ego trust is a gift to qualified donee of securities described in subparagraph 38(a.1)(i), the trust’s taxable capital gain that results from the disposition of the gift of such securities would be equal to zero.”
This answer is of course highly technical but will be of use to fundraisers who advise on this sort of gift giving and estate planning as well as to lawyers who have to implement the mechanics.