Charitable Remainder Trusts

Charitable remainder trusts (CRT) have been a popular gifting method in the United States for many years largely due to their special tax treatment.

While the taxing of these gift instruments is not as advantageous in Canada they can still be of interest to donors who have significant assets and wish to continue the income of the assets for their or their heirs’ lifetime and are interested in gifting the remainder to their favourite charity.

Gifts of residual interest are a similar structure but refer to gifts of real property, such as a principal residence or vacation home, where the donor will retain the use of the property during their lifetime or that of a specified heir and afterwards the property will be gifted to the charity.

Gift Examples

  • Investment assets for CRTs
  • Principal residence, vacation property, artwork, cultural property

Benefits to the Donor

  • Donation receipt for the present value of the remainder interest
  • Donor retains income generated
  • Elimination of probate fees if trust is established during lifetime of donor

Most Appropriate for

  • Donors who have considerable assets and still require income or wish to provide income for an heir but are interested in making a gift of the remainder interest.
  • Donors who wish to continue to enjoy property or art collections but would like to make a gift of the residual interest to their chosen charity

Example

Ms. Nakamura transfers securities that currently pay her an annual dividend of $12,500, have a fair market value of $500,000 and a cost base of $300,000 to a charitable remainder trust established with a trust company.

Ms. Nakamura is 65 and subject to a 45% combined tax rate. The present value of the remainder gift is calculated using the Canadian Life tables and a discount rate of 6%, resulting in a present value of the remainder of $200,297. The trustee sells the current assets and invests in corporate bonds resulting in a net income after trust expenses of $25,000.

Fair market value of trust assets $ 500,000
Cost base 200,000
Capital gains (50% * $200,000) 100,000
Tax on capital gains 45,000
Donation receipt 200,297
Tax credit on gift 90,134
Net tax credit 45,134

 

For illustration purposes a combined tax rate of 45% was used. Please note that combined tax rates vary across the provinces. 2015 tax table.

Note to reader: The purpose of this publication is to provide general information, not to render legal advice. In addition any changes in the tax structure may affect the examples listed in this information. Your client should consult their own lawyer or other professional advisor about the applicability of this information to their situation.

Types of Charitable Remainder Trusts

Charitable Remainder Trusts (CRT) can be established during the life (inter vivos) of the donor or through the will (testamentary). The donor may decide to establish a trust where the beneficiary may be changed (revocable) or make the decision permanent (irrevocable). If the donor establishes a trust that meets the following conditions a charitable receipt may be issued by the beneficiary charity:

  • Transfer is irrevocable
  • The property must be held by the charity at the time of transfer
  • Value of the residual interest is ascertainable
  • No encroachment on capital and any administrative fees are to be paid from income of the trust

The trust may allow any of the above and still provide a gift for the charity, however as the value of the gift is not certain or ascertainable it is not eligible for a donation receipt.

Additional Resources

Charitable Remainder Trusts – Client info sheet
(add your own label or stamp to customize it for your clients)

Donor Story

James Assad was retired and in his late seventies. The stocks he owned had high market values, but they paid limited dividends. In addition to increasing his personal income, James was interested in giving back to the community in which he had lived his entire life.

James decided to transfer his securities to a Charitable Remainder Trust that eventually would create a fund with his local community foundation.

“The income I receive from the trust is more than what I was collecting in annual dividends,” says James. He also receives an immediate tax credit by making the community foundation the irrevocable beneficiary of the remainder.

“Plus,” he says, “I know that when I pass on, I’ve done something good.” In time, James’ gift will create the Assad Family Unrestricted Fund to address ever-changing community needs.