“the guaranteed current use of the donation receipt makes the donation to the CRT attractive.”
Many individuals decide to make sizable gifts to their favourite charities. This may be for a number of reasons, including the creation of a lasting legacy in the donor’s name.
Often these bequests arise on the death of the donor and are made pursuant to the donor’s will. This may not always be the best time to make a large gift, as the resulting tax credit may not be fully used if there is insufficient income or deemed capital gains in the year ending at the date of death. In this common scenario, the tax savings related to the gift are lost.
A Charitable Remainder Trust (CRT) set up during the donor’s life is an excellent way to facilitate the gift on death but receive the tax credit now. You can also preserve the income stream earned on the asset during the remaining years of the life of the donor and, if desired, the donor’s spouse.
Here’s how a CRT works.
The donor can create a CRT of which his spouse is the income beneficiary and the charity is the residual capital beneficiary. A gift of cash (or perhaps publicly-traded securities) is made to the CRT. The charity can issue a tax receipt for the net present value of the assets donated. The net present value is actuarially determined based on the remaining number of years the CRT is expected to hold the assets (assuming a last-to-die payout). The donor can use the tax receipt to reduce tax payable for the year the property is “gifted” to the CRT and the following five taxation years. Although the receipt will be for an actuarially determined discounted amount, the guaranteed current use of the donation receipt makes the donation to the CRT attractive. Also, income from the assets can continue to be paid to the donor and then to his surviving spouse.
Moreover, the donor may gain more personal satisfaction in knowing that the ultimate gift to charity is established during his lifetime.
On the death of the donor (or spouse, if the CRT is so structured), the assets will be transferred to the charity. There is no tax to the donor as the CRT property rolls to the charity as the residual capital beneficiary.
If you are interested in learning more about CRT’s, please contact your TSG representative.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.
