In December 2011, CRA released a technical interpretation that offers clarification on the rules surrounding donations to registered charities from spousal trusts. Such clarification is valuable both to charities issuing receipts as well as well as to advisors in the area of estate and gift planning. The tax consequences to a deceased taxpayer as well as to the taxpayer’s estate as a result of a charitable donation specified in a Will or testamentary document can vary significantly depending on the precise terms and wording of the document, and it is important to understand the potential pitfalls. In the CRA technical interpretation, CRA addressed two specific questions:
- where a Will provides for a spousal trust with trustee encroachment power plus a specific bequest to be made to a charity on the death of the spouse, can the deceased taxpayer claim a donation credit on his or her terminal return?
- if no credit can be claimed on the terminal return, will the spousal trust be entitled to claim the donation tax credit?
Addressing the first question, CRA first confirmed that the tax treatment of a testamentary gift will depend on the terms and conditions of a deceased’s Will. Where such a gift constitutes a “gift by the individual’s Will”, a tax credit may be claimed on the deceased taxpayer’s terminal return, with any excess carried back to the year preceding death.
The clearest cases in which a gift will be found to have been made by an individual’s Will are when the terms of the Will require that the estate trustees donate a fixed amount or the residue of the estate (provided this can be clearly valued) as soon as practicable after death (allowing for delays related to the administration of the estate). We reported on the timing and valuation of such gifts in a previous Newsletter.
Where the testamentary instrument creates a testamentary trust that constitutes a spouse or common-law partner trust, with a specific amount of assets remaining to be distributed to the charity upon the death of the surviving spouse or common law partner, it must be determined whether the charity received an equitable interest in the trust upon the death of the taxpayer. CRA stated in the technical interpretation that, in general, where the Will directs the trustees to make a donation to the charity of a specific property, a specified amount or a specific percentage of the residue, and it is clear from the terms of the Will that the trustee was required to make the gift, once completed the gift would likely constitute a gift of an equitable interest in the spousal trust. This would result in the gift being claimable on the taxpayer’s terminal return, and not by the trust.
Charities and advisors should note that CRA has in the past taken a contrary position with respect to non-discretionary donations of property remaining in a spousal trust on the death of the surviving spouse. CRA has taken the position that non-discretionary distributions from a spousal trust on the death of the surviving spouse do not constitute gifts by Will nor gifts from the trust, on the basis that they are made in satisfaction of a binding obligation in the trust document (and as such are not voluntary). While there is some question as to the correctness of this position, charities and advisors should be cautious when recommending non-discretionary distributions to a charity from a spousal trust on the death of the surviving spouse. In some cases, it may be prudent to re-structure the gift as an immediate donation upon death or a discretionary gift by the estate trustees. Subject to the issues below, these approaches may provide greater certainty regarding the tax consequences.
CRA stated in the technical interpretation that where a Will reflects donative intent, but the trustee has some discretion respecting the gift, the tax treatment will depend on the circumstances and the precise wording of the Will. If the Will provides for encroachment in favour of the surviving spouse, but this encroachment is limited to all trust property except that designated for donation to charity, this would likely constitute a gift by Will in the year of the taxpayer’s death. If the trustee has discretion whether to make the gift, and chooses to make a gift from the spousal trust upon the death of the surviving spouse, this will normally be treated as a gift from the trust in the year of the spouse’s death and not a gift by Will claimable on the taxpayer’s terminal return. The trust would therefore claim a credit in the year of the spouse’s death.
Where, however, the Will provides for unlimited encroachment in favour of the surviving spouse, this will normally disqualify the gift as its ultimate value may be too uncertain. CRA notes in the technical interpretation, however, that CRA may accept a gift as having been made by Will in the year of the taxpayer’s death if the surviving spouse irrevocably disclaims his or her interest in the capital (or specific property) and the trustees undertake not to exercise their authority to make the capital or specific property of the trust available to the spouse.
It is clear that the tax consequences where a gift is made from a spousal trust can vary significantly. Considerable care must be taken when drafting Wills to ensure the desired tax result. Charities must also be familiar with these rules to ensure that all receipts are issued properly.