| Bad Legal Drafting Means no Charitable Tax Credits |
Arthur Drache, February 25, 2010
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| A recently released CRA ruling letter cogently sets out the law and administrative policies of the Agency with regard to testamentary trusts, trusts created under a will and in particular, such trusts which have charities as beneficiaries. The ruling letter poses a number of timing and technical questions but the final question is whether the deceased's executor can claim any amount of the gift on the final tax return given that the general rule is that a gift made under a will is deemed to have been made immediately prior to death. |
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| While we are not provided with the specifics of the drafting, we are told that the will instructs the trustee to hold and keep invested the residue of the estate in a trust, and to pay the net income in equal shares to named beneficiaries, each of which is a registered charity. But such a trust cannot "live" indefinitely (unless the trust itself were a charity) and there apparently was no provision for a distribution of capital in either the near or long terms. |
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| It may be that the individual wanted the trust to operate forever making distributions annually but if that were the case, it would take some very careful tax and estate planning to achieve it. |
| The flaw in the drafting becomes the key in the CRA ruling on whether a tax credit can be claimed in the year of death. In the words of the CRA: |
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| "Pursuant to subsection 118.1(5), a gift made by an individual's will is deemed to have been made, for purposes of subsection 118.1(1), immediately before the individual's death, and as such, is claimed in the final T1 return of the deceased taxpayer. For information on gifts made by an individual's will, we would refer you to the comments in IT-226R, "Gift to a Charity of a Residual Interest in Real Property or an Equitable Interest in a Trust", which is available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tp/it226r/it226r-e.html. |
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| As we have discussed with you, the specific will that you have referred to us for comments appears to be silent as to who would be the capital beneficiary of the trust. This raises a number of questions; however, since it is not clear who would receive the capital and at what time, we do not see how any amount could be allowed as a gift by the individual's will pursuant to subsection 118.1(5). As noted in paragraph 6 of IT-226R, in cases where the size of a residual or equitable interest at the time of its donation cannot reasonably be determined, no deduction or tax credit in respect of the donation will be allowed." |
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| What was needed to have even a shot of a contemporary tax credit claim was some indication of when the capital would be distributed and to which organizations. Absent that data, it is impossible to determine the size and value of the gift at the time of death and thus there is no way a tax credit claim can be sustained. |
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| We should say that the facts are not unique. On several occasions over the past fifteen or twenty years we have seen wills with similar trusts created or, more happily, drafts of such wills which could be changed so that a tax credit claim could be made. There is a notion out there in some donors that a trust can be created that will live in perpetuity, growing capital and sprinkling income. That can be achieved but only with a very specific approach to the issue, not simply through the creation of a testamentary trust in a will. |
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