Charitable gifting through a spousal trust – is the donation tax credit available?

To get the tax credit, special attention to planning and drafting the spouse trust is required.

Sean Rheubottom, B.A., LL.B. TEP

Stated very simply, tax laws regarding charitable gifts made at death allow you to shift the amount of tax that would otherwise have resulted from the gifted assets to the charity rather than to the government. By making a charitable gift, you don’t get back more than what you gave. But it’s important to ensure that the tax credit is available so that you are providing the maximum possible benefit to the charity and your other beneficiaries.

I recently had an opportunity to review a client’s estate plan and recommended some changes to take into an account Canada Revenue Agency’s (CRA’s) recently updated interpretation of the charitable donation tax laws. The updated plan will save them over $800,000 in tax on the death of the first spouse. That value will benefit their charity.

Gift from spouse trust to charity

Sometimes a person’s Will includes a direction to create a “qualified spouse trust”, which is a trust that (after the death of the Will-maker) will hold an asset in trust for the surviving spouse (the “beneficiary spouse”), the terms of which provide that the spouse will receive all of the income from the trust for life, and no one but the spouse can ever receive or access the capital of the trust as long as the spouse is alive.

If the trust is drafted properly, the property “rolls” to the spouse trust without the deemed realization of capital gains that would otherwise happen as a consequence of death. Later, on the death of the beneficiary spouse, assets remaining in the spouse trust will be subject to the deemed realization of capital gains that was deferred on the first death. 

Such a trust normally provides that on the death of the beneficiary spouse, any remaining capital from the trust is to be given to contingent beneficiaries such as children. What if the trust directs that some amount be given to a registered charity?

In that case we want to make sure that the gift to the charity qualifies for the charitable donation tax credit. If the gift is large, this credit may offset a great deal of the tax that results on the death of the beneficiary spouse.

No tax credit unless planned correctly

It may surprise you to learn that if the charity receives the trust assets as a beneficiary of the spouse trust, there is no charitable gift for tax purposes.

It is only if the trustee is given discretion as to whether or not to make the charitable gift that there is a charitable gift for tax purposes.

CRA has recently confirmed their view on this in response to a question posed by tax and legal professionals. Based on common law regarding what constitutes a “gift”, and CRA interpretations of how gifts were properly made by Will under past tax laws, and a consideration of how recently updated tax laws deal with assets held in a spouse trust, it appears that CRA is correct. Perhaps some day, tax laws could be updated to address this.

In order to achieve a gift for tax purposes, special attention to planning and drafting the spouse trust is required. Sometimes a completely different plan works better for tax purposes.

This interpretation of the tax laws by CRA may not have been anticipated when planning was done in the past. If you have made or intend to make a charitable gift in your Will, it’s a good idea to carefully review and update your planning.

© Heritage Private Wealth Law

General information only; not intended as legal or tax advice. Readers are encouraged to obtain legal and tax advice before acting in their specific circumstances.