By Ryan M. Prendergast

In the CRA technical interpretation document 2022-0943881E5, from March 10, 2023, the CRA addressed the question of whether an individual can add the taxable capital gain realized on the transfer of property to a charitable remainder trust (“CRT”) into “total gifts” as defined in subsection 118.1(1) of the Income Tax Act (“ITA”). The individual had transferred the property to a CRT and then gifted an equitable interest in the trust to a qualified donee. The CRA took the position that the realized taxable capital gain on the property transfer to the CRT is not eligible for inclusion in the formula to determine “total gifts” as explained below because the property that is the subject of the gift is the equitable interest in the trust, and not the property being settled in the trust.

The CRA explains that a CRT is not an entity specifically dealt with in the ITA, but is a widely used term for gift planning structures in which a qualified donee (i.e. a registered charity) has an interest. The CRA has traditionally held that if someone transfers capital property to a trust and a qualified donee is granted an equitable interest in the trust, allowing them to receive the property once there are no more income beneficiaries could be considered a gift from the person who set up the trust to the qualified donee. The property considered to have been gifted to the qualified donee is the equitable interest in the trust and not the capital property actually transferred to the trust by the settlor.

For an equitable interest in a trust to be considered a gift to a qualified donee, the transfer of property to fulfill the qualified donee’s capital interest must be permanent and the qualified donee’s right to receive the trust’s property in the future must be guaranteed and irrevocable.

Referencing subsection 118.1(1) of the ITA, the CRA states that a taxpayer’s “total gifts” for a year is calculated based on their “total charitable gifts”, “total cultural gifts” and “total ecological gifts”. Paragraph (a) of the “total gifts” definition includes the lesser of the following amounts:

1. the individual’s total charitable gifts for the year;
2. the individual’s income for the year where the individual dies in the year or in the following taxation year; and
3. in any other case, the lesser of the individual’s income for the year and the amount determined by a formula that includes, among other things, the total of,

1. 75% of variable A, described as the individual’s income for the year; and
2. 25% of variable B, described as the taxable capital gain in respect of a gift made by the individual in the taxation year (in respect of which gift an eligible amount is included in the individual’s total charitable gifts for the taxation year).

Given CRA’s position that property gifted by the individual to the qualified donee is an equitable interest in a CRT (the eligible amount of which is included in the individual’s total charitable gifts), then the taxable capital gain referred to in Variable B concerning the gift of that equitable interest and the individual’s taxable capital gain arising from the transfer of the capital property to the CRT would not be included in Variable B of paragraph (a) of the definition of “total gifts” in subsection 118.1(1) of the ITA.

Given the complexity involved with CRT’s and the potential tax consequences, donors need to carefully work with their advisors to avoid any unintended consequences in transferring capital property to CRTs.

​Read the Sept 2023 Charity & NFP Law Update