M. Shea-DesRosiers (613) 957-8953
September 7, 1988
Dear Sirs:
Re: Your file: 87-3936 Residual Interests in a Testamentary Trust
This is in reply to your letter of August 22, 1988 wherein you request a technical interpretation with respect to the income tax consequences of a will plan as proposed below.
While in the process of developing an Individual's will plan, you are considering establishing a spousal trust (the "Spousal Trust"). The Spousal Trust would provide that the trustees are to invest the assets of the trust, pay all of the net income to the spouse and, on her death, pay the capital of the Spousal Trust to a registered charity. The trustees would also have discretion to encroach on the capital of the Spousal Trust for the benefit of the spouse. The gift to the registered charity would vest indefeasibly at the time of the Individual's death, subject to the future right of possession.
You ask the following questions:
1. Does Interpretation Bulletin IT-226 , dated June 2, 1975, apply to a residual interest in a testamentary trust to entitle the Individual to a deduction (or a credit as proposed by Bill C-139) under paragraph 110(1)(a) or 110(1)(b) of the Income Tax Act (the "Act") equal to the present value of the residual interest gifted to the registered charity, to be claimed in his T-1 Terminal Return (subject to the 20 per cent limit)?
2. If the answer to question 1 is "No" would the Individual's estate upon the death of the spouse who is the beneficiary of the Spousal Trust, and the transfer of the trust property to the registered charity, be entitled to a deduction (or credit) under the Act?
3. Would the answer to question 2 be different if there were no power to encroach on the capital of the Spousal Trust?
Our Comments
Question 1
Interpretation Bulletin IT-226 at paragraph 4 states that "In cases where the residual interest is not reasonably ascertainable, such as when the life tenant has the right to encroach on capital, no deduction in respect of charitable donations will be allowed". It follows that the answer to your first question is "No".
Question 2
The Individual's estate, upon the death of the beneficiary spouse and the transfer of the trust property to the registered charity, would be entitled to a deduction (or credit as proposed by Bill C-139) under paragraph 110(1)(a) or 110(l)(b) of the Income Tax Act for the amount so transferred.
Question 3
If there were no encroachment power and the residual interest in the estate is ascertainable at the time of death, the gift could be claimed on the deceased's T-1 Terminal Return. In such a case the estate would not be entitled to a deduction on the ultimate distribution to the charity.
We trust these comments will be of assistance to you.
Yours truly,
for Director Financial Industries Division Rulings Directorate