Oct 2019 Charity & NFP Law Update
A On September 25, 2019, the Canada Revenue Agency (“CRA”) released CRA View, Document 2019-0798491C6 (“CRA View”), concerning donations from alter ego trusts to charities following a settlor’s death, as discussed at the 2019 STEP CRA Roundtable on June 7, 2019. As this CRA View is highly
detailed and nuanced, this article only provides a brief summary of the CRA’s position, and those interested should read the full CRA View, which is available via online subscription services.
The CRA View considers various questions concerning a hypothetical alter ego trust and donations made by it following the death of the settlor. In this regard, the question involves an alter ego trust that owns publicly traded securities that have appreciated in value and various scenarios where after the death of the settlor, donations are made to registered charities. In this regard, the CRA View indicates that where the settlor dies, there is a deemed year-end at the end of the day on which the settlor dies pursuant to subsection 104(13.4) of the Income Tax Act (“ITA”). Subsection 104(4) of the ITA indicates that the alter ego trust would also realize a capital gain at that time. The CRA View then looks at different scenarios where the alter ego trust makes donations to registered charities.
In this regard, where the residual beneficiary after the settlor’s death is a registered charity, and a distribution is made to that charity, the CRA View indicates that it is a mixed question of fact and law whether the payment from the trust to the charity is a charitable gift eligible for a subsection 118.1(3) donation tax credit, or a distribution of income or capital to a beneficiary of the trust. This would depend on the specific wording of the trust agreement and the trustee’s intentions in making the payment to the charity. Where the trustee has no discretion regarding whether the payment is made to the charity, the
payment would not qualify as a gift and would therefore not be eligible for the donation tax credit. Conversely, where the trustee is clearly given the discretion to decide how the funds are to be used, the payment to the charity would be voluntary and would be considered a charitable gift eligible for the donation tax credit. The CRA View also indicates that the same principle would apply where the residual beneficiaries are a class of registered charities as determined by the trustees, and where the trustees may make payments over a period of time, to those various registered charities.
Where the donation from the alter ego trust consists of certain publicly-traded securities, subparagraph 38(a.1)(i) of the ITA 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. In such circumstances, the CRA View indicates that the taxable capital gain of the trust resulting from the disposition would be equal to zero.