Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Whether a charitable organization which has been named as the sole residual beneficiary of an estate of a deceased taxpayer (the "Estate") could be treated by the Estate as an income beneficiary in regards to the periodic annuity payments under a fixed term annuity which continue after death and are received by the Estate for the period commencing at the date of death and ending when the guarantee period expires.
Position TAKEN:
None. Question of fact. General comments provided.
Reasons FOR POSITION TAKEN:
Generally, it is our understanding that, unless the will provides sufficient discretion for the executors as discussed below, the Estate could not make a donation that would qualify for a tax credit for donations and gifts for the Estate.
However, the estate of a deceased taxpayer is a taxpayer separate and distinct from the deceased and, accordingly, could claim a donation if it is in fact the donor. As such, if the deceased's will provides sufficient discretion for the executors to decide on whether or not to make a donation the estate may be entitled to the tax credit for donations and gifts.
XXXXXXXXXX 2000-002918
P. Diguer CGA
Attention: XXXXXXXXXX
August 9, 2000
Dear Sir:
Re: Section 118.1 of the Income Tax Act (Canada)
This is in reply to your letter dated May 29, 2000 in which you request the Canada Customs & Revenue Agency's (the "Agency") views on whether a charitable organization which has been named as the sole residual beneficiary of an estate of a deceased taxpayer (the "Estate") could be treated by the Estate as an income beneficiary in regards to periodic payments received by the Estate under a fixed term annuity. The expression "charitable organization" as referred to here and subsequently has the meaning assigned by subsection 149.1(1) of the Income Tax Act (Canada) (the "Act").
Specifically, in your letter you describe a situation where as of the date of death, the guaranteed payment period of a fixed term annuity had not been completed and as such, the Estate receives monthly annuity payments which will continue until the guarantee period expires. In particular you ask:
1. Could the Estate treat the charitable organization as an income beneficiary if the Estate were to distribute the annuity payment, less applicable tax (if any), to the charitable organization?
2. Alternatively, would amounts paid by the Estate, equal to the periodic annuity payments received by the Estate, qualify as a charitable donation made by the Estate?
3. If the periodic annuity payments must be included in the deceased's final tax return, is the total of future payments the proper amount to report or would a discounted amount be the proper valuation method?
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R3 dated December 30, 1996. Nevertheless, we offer the following general comments in connection with your request which we hope are of assistance to you.
A definitive response to your queries would require a complete review of the specific facts as they relate to a particular situation including several factual elements not mentioned in your letter. For example, whether there are income beneficiaries named in the will with respect to the periodic annuity payments or any beneficiaries named in the fixed term annuity contract. Consequently, in formulating our reply we assumed that an income beneficiary, other than the charitable organization, is mentioned in the will. Our general comments are as follows.
In computing the income of a deceased taxpayer, a capital property of the taxpayer at the time of death is deemed, by virtue of subsection 70(5) of the Act, to have, immediately before the taxpayer's death, been disposed of for proceeds equal to the fair market value of the property immediately before the death. The fair market value of the annuity would not be equal to the total of the payments to be received for the guarantee period. It would be equal to the commuted value of the annuity immediately before death. In determining this value it may be helpful to discuss the issue with the issuer of the fixed term annuity contract.
Subsection 118.1(5) deems gifts made by an individual by will to have been made in the year of the individual's death, hence allowing the donation to be claimed on the final return even though the transfer is made after death by the deceased's representatives. In this regard we refer you to paragraphs 2, 3 and 5 of IT-226R which discusses the gifting by a testamentary donation of an equitable interest in a trust and the valuation of such gifts. Thus if, under the terms of the will, the guaranteed annuity or the annuity payments for the guaranteed period had been donated to the charitable organization the deceased would have been entitled to a non-refundable tax credit base on the fair market value of the annuity. However, it appears that this was not the case in your situation.
Generally, it is our understanding that, unless the will provides sufficient discretion for the executors as discussed below, the Estate could not unilaterally choose to make a donation, select a charitable organization to receive the amount and make a donation that would qualify for a tax credit for donations and gifts. The terms of a testamentary trust are established by the will, by law if there is no will, or by court order under provincial dependant's relief or support law.
The estate of a deceased taxpayer is a taxpayer separate and distinct from the deceased and, accordingly, could claim a donation if it is in fact the donor. As such, if the deceased's will provides sufficient discretion for the executors to decide on whether or not to make a donation the estate may be entitled to the donation credit. In this regard, p.37 of the 1999 T3 Guide provides the following statement:
If the will provides that a donation can be made at the discretion of the trustee, you can:
- choose to treat the charity as an income beneficiary and deduct the amount of income payable to the charity on line 47 of the T3 return; or
- claim a non-refundable tax credit on line 1112 of Schedule 11.
Thus, if the will provides the requisite discretion to the trustee, he or she may have the Estate choose to treat the charitable organization as an income beneficiary in regards to the income portion of the annuity payments and deduct the donated income amount in computing the Estate's net income or the Estate could claim a credit for the entire amount of the donation (i.e. the income and capital portion of the donated annuity payment).
We trust that our comments will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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