CRTs are alive and well in Canada. at least at the CRA Rulings Directorate
C. Yvonne Chenier, Q.C.
Over the past decade there have been many positive changes relating to the tax treatment of charitable donations such as the full capital gain exemption with regard to publicly traded securities. These changes, by all accounts, have resulted in increased donations and have been well received by donors trying to maximize their contributions to charity while doing their financial and estate planning. However, despite parliamentary submissions, much writing on the subject and the charitable sector repeatedly asking for changes, the structure known as a charitable remainder trust has not received any attention and there have been no positive changes.
Unlike the United States, where charitable remainder trusts, their treatment and rules governing them are specifically laid out in the tax code, we have no such direction in Canada. Planners are left in the dark (or at least in the uncomfortable grey zone) when dealing with a client who wants to benefit the charity of their choice after their own beneficiaries are finished using the income from hard earned property. All estate and philanthropy planners have to work with is the general information that the CRA has on its website together with the interpretation bulletin (IT -226R) that is more than two decades old. The CRA’s policy statement that tries to describe exactly what a charitable remainder trust is in the eyes of the CRA simply provides as follows:
“A charitable remainder trust involves transferring property into a trust whereby the donor retains a life interest in the property but makes an irrevocable gift of the residual interest to a registered charity. A registered charity can issue an official donation receipt for the fair market value of the residual interest in the property at the time that the residual interest vests in the charity.”
The first part of this generally describes the structure that the taxpayer is concerned with and the second part describes the issuing of the receipt that those running a charity can lose sleep about.
An Intuitive Planning Tool for Many
Generous donors in Canada realize that they have property to give to charity upon their death but that they or others close to them have need for the income that would be generated by that property during their lifetime. Intuitively, since the donor is divesting themself of the property and will have no further benefit of the capital, the donor feels that it is the same as giving away the capital and hence looks for the amount given to be the subject of a charitable tax receipt for income tax purposes. Unfortunately, the planner advising such a client would look in vain to the provisions of our Income Tax Act and, for the sake of certainty, is left with the only choice of going for an advance ruling to the Tax Ruling Directorate of the Canada Revenue Agency.
A Recent Ruling
A plan by a taxpayer in Quebec was recently submitted to the CRA Rulings Directorate. The taxpayer wanted to settle a trust by an irrevocable gift of cash. The trust document stipulated that the cash was to be used to buy certain investments. The income from these investments had to be allocated to listed beneficiaries and the capital had to be allocated to specified charitable organizations and public foundations in Canada. This is one way to do an estate freeze for taxpayers who want to ultimately be good charitable citizens when their loved ones needs for the income generated by their capital is satisfied. The main question that the Rulings Directorate had to decide was if the gift of interest in the capital of the trust capital to the charities is covered by the definition of “total charitable gifts” in subsection 118.1(1) for the taxation year in which the trust is created, provided that subsection 118.1(2) be respected (i.e. a proper charitable tax receipt is filed). The CRA answered the question in the affirmative, so in this case it was accepted that the capital was a total charitable gift and it could be treated as such for that taxation year when the trust was created.
What is helpful about this Ruling
Besides the fact that the gift (in this case cash was given to be converted into capital property inside the trust) is considered a gift in the year in which it was made to the trust, the other notable fact is that the CRA Rulings Directorate is prepared to review the structures on a case by case basis. CRA always cautions that such rulings can be relied upon only if the facts are identical to the proposed transactions and advises taxpayers to request an advance income tax ruling to confirm the income tax consequences of their particular proposed transactions. So in the absence of a legislative framework, if philanthropists and their creative advisers can stick to the spirit of the summary policy and the interpretation bulletin when creating charitable remainder trusts, their plans may be given the blessing of the CRA by a ruling and they can proceed to implement their structure with some certainty.
One other interesting facet of the ruling was that the trust document specifically spelled out that the definition of “net income” to be paid to the income beneficiaries was to be not that of the definition found in the Income Tax Act. The trust document made it very clear that that the capital gain income (less any tax payable thereon) was to be reinvested for the benefit of the capital beneficiaries. The ruling did not comment on this but perhaps because it is obvious that capital gains are considered capital and should not be encroached upon in these kinds of trusts to the detriment of the capital beneficiaries.
What Has Not Been Settled By This Ruling
While the structure of the CRTs may proceed with some certainty on a ruling by ruling basis, the real crux of the matter, as far as most donors’ pocketbooks are concerned, is the actual amount of the tax receipt that the charity can issue for the gift that it will ultimately receive. This ruling simply stated, as IT -226R anticipates, that the amount of the tax receipt that will be issued by each capital beneficiary charity is based on the fair market value of the capital acquired in the trust, and the following criteria will be considered:
· The types of investments acquired by the Trust (risk, historical performance, etc.);
· The current rate of interest;
· The life expectancy of the income beneficiaries
However, as is often the case in many areas in tax law, the devil is in the details. In this case the Rulings Directorate specifically commented that their decision must not be construed as acquiescence on the part of the CRA that the fair market value and the method of valuation of the capital of the trust is an acceptable and appropriate method. So this ruling is of no help to the actual actuarial calculations to be made and whether or not the CRA would at the end of the day accept the valuations that would be put on the assets for the purpose of the tax receipt. Perhaps in this case a further ruling will be necessary and we will find out the answer to that most important question. Since the case of O’Brien Estate v. MNR involving a charitable remainder trust structure in a will, where the court held that the testator made a gift equal to an actuarial estimate of the value of the future payments to be made to the charity, charities have been waiting for guidance for these “actuarial estimates”.
The US Model
Unlike Canada’s tax laws, the US Tax Code makes these kinds of donation arrangements taxpayer friendly as they are codified in their tax code. They even have catchy acronyms such as the CRAT (charitable remainder annuity trust) and the CRUT (charitable remainder unitrust), depending on the manner of payment to the non-charity beneficiary. Any donor or their planners can avail themselves of this information to decide if a donation would be beneficial for their financial and estate planning and worthwhile for them to make in any tax year. Specifically in the US Tax Code there is detailed information about the tax treatment of the donation by the donor, the cost of the property to the trust i.e. at what cost base does the trust acquire the property, whether or not the charitable remainder trust itself is taxable, and how to value the gift to the charity for the purpose of the tax receipt. This latter detail is important and is what charitable organizations in Canada lack and why they are hesitant to receive and issue a receipt for such a gift. In the United States, these tax receipt potential valuations are listed in tables for all to see.
Canadian Tax reform would be helpful
It is unfortunate that such a potentially common and much needed planning tool is relegated to the Rulings Directorate of CRA on a case by case basis and that no certainty exists in our Income Tax Act for all to see and plan accordingly. As the population ages and high net worth individuals want to avail themselves of this kind of planning it is hoped that the Department of Finance will see the potential overburdening of the CRA Rulings Directorate and in fact devote their minds to codifying the workings of a charitable remainder trust in our Income Tax Act, as has been done in the United States.
 Interpretation Bulletin IT-226R, “Gift to a Charity of a Residual Interest in Real Property or
an Equitable in a Trust”
 Summary Policy October 25, 2002 CSP-C02
 91 DTC 1349 (TCC)
 26 USC § 664
 See for example the tables in http://www.irs.gov/pub/irs-regs/td8819.pdf