5 October 2018 APFF Roundtable Q. 3, 2018-0768841C6 F - Rollover under 73(1) and gifts to charities
Principal Issues: (1) In the case of an alter ego, a spousal, a joint spousal or a common law partner trust, whether the rollover provided in subsection 73(1) is available if the terms of the trust deed allows the trustee to make donations in favor of charities before the death of the individual, his spouse or his common law partner, as the case may be? (2) Whether our position would be different if the trustee does not make any donation during the individual, his spouse or his common law partner’s lifetime?
Position: (1) No, the trust will generally not qualify for a rollover under subsection 73(1). (2) No, our position remains the same.
Reasons: (1) As a result of the possibility to make donations to charities out of the trust capital or income, persons other than the individual, his spouse or his common-law partner may obtain the use of the trust income or capital before the death of the individual, his spouse or his common-law partner, as the case may be. (2) The mere possibility of a person other than the individual, his spouse or his common law partner, as the case may be, receiving or obtaining, before the latter’s death, the use of the trust capital or income is sufficient to disqualify the property transfer from the rollover.
FEDERAL TAX ROUNDTABLE 5 OCTOBER 2018
2018 APFF CONFERENCE
Question 3
Section 73 trusts and charitable donations
Ss. 73(1.01) and (1.02) specify, inter alia, conditions in order for an inter vivos transfer of capital property by an individual to a trust for the benefit of the individual (and/or a spouse or common-law partner, as the case may be) to be effected on a rollover basis, in particular:
- no other person than the individual (and/or spouse or common-law partner) is entitled before the death of the individual (and/or spouse or common-law partner) to receive or obtain the use of any of the income or capital of the trust; and
- in the case of a trust for the benefit of the individual or a joint trust for the benefit of the individual and spouse/common-law partner:
- the individual has attained the age of 65 at the time the trust was created; or
- the transfer did not result in a change in beneficial ownership of the property and immediately after the transfer there was no absolute or contingent right of a person (other than the individual) or a partnership as a beneficiary.
We understand that a charitable organization could receive the residual interest in such a trust on the death of the individual. Indeed, in Technical Interpretation 2010-0359461C6 (footnote 1), CRA stated that where a donor makes a gift of a residual interest in a trust to a registered charitable organization and no encroachment on capital in favour of the settlor is permitted, a charitable receipt can be issued by the organization at that time equal to the value of the residual interest at the time that interest is received.
Question to the CRA
In the event that the terms of the deed of trust provide for the possibility of making gifts to a charitable organization before the death of the individual (and/or spouse or common-law partner) would that have the effect of disqualifying the trust for the purposes of the subsection 73 rollover? In particular, notwithstanding that the deed of trust provided for such possibility, if no gift in fact was made during the individual’s life, would the result be the same?
CRA Response
For purposes of a rollover provided for in subsection 73(1), no person other than the taxpayers referred to in paragraph 73(1.01)(c) can, before the death of the individual, receive or otherwise obtain the use of any of the income or capital of the trust.
The question of whether the condition set out in paragraph 73(1.01)(c) is satisfied is a question of fact and law that can only be resolved after a thorough examination of all the facts, actions, circumstances and relevant documents surrounding each situation.
Where the terms of a trust indenture provide for the possibility of making gifts to a charitable organization, that is to a person other than the taxpayers referred to in paragraph 73(1.01)(c), before the death of the latter, we are of the view that the condition set out in that paragraph is not satisfied.
The fact that no gift was made during the lifetime of the taxpayers referred to in paragraph 73(1.01)(c) does not change our position. Indeed, the mere possibility that a person other than the latter may, before their death, receive or otherwise obtain the use of any of the income or capital of the trust is sufficient to disqualify the trust for the purposes of the rollover provided for in subsection 73(1).
Marie-Claude Routhier
(613) 670-8921
5 October 2018
2018-076884
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 CANADA REVENUE AGENCY, Technical Interpretation 2010-0359461C6, 4 May 2010.
2 Subparagraph 73(1.01)(c)(i) concerns the spouse or common-law partner of an individual, subparagraph 73(1.01)(c)(ii) concerns the individual and subparagraph 73(1.01)(c)(iii) concerns the individual and the individual’s spouse or common-law partner.