15 value of the donation is available to off- set tax owing from other sources at the highest rates. RESIDUAL INTERESTS It is possible to divide ownership of the property during one’s life (called a life interest) from ownership upon the death of that person (called a residual inter- est). Once the residual interest is sold or given away, however, the property will belong to the owner of the residual interest when the owner of the life inter- est dies. A donor might consider this course of action in situations where they want to enjoy the income or use of the property during their lifetime and yet donate the property to the charity during their lifetime as opposed to on their death. The value of the residual interest is cal- culated using an estimated value of the underlying property at the expected death of the donor (in itself determined from actuarial mortality tables) using present value dollars. This amount will be the value listed on the charity’s dona- tion receipt. Determining the fair market value of a property at the expected death of the owner at some point in the future is a complicated mathematical task best left to a qualified actuary and appraiser. From a tax perspective, when the owner divides the rights and donates the resid- ual interest, the donor would generally incur a tax consequence. The tax owing will be a function of the cost of the right to the owner and its estimated value at the time of disposition. Generally speak- ing, this income will be treated as a cap- ital gain. The capital gain is calculated according to a specific formula and depends on the gain in value of the residual interest relative to the entire property. CHARITABLE REMAINDER TRUST A trust is a legal device which effectively accomplishes one or both of the follow- ing objectives: • It separates the ownership of property (the capital interest) from the right to receive income from the property (the income interest); and, • It can separate the person who legally controls the property from those enti- tled to benefit from it. A Charitable Remainder Trust (CRT) is similar to the donation of a residual interest in that it allows the donor to donate the capital of the trust now, but the charity does not receive it until some later point (such as on the death of the donor). A CRT is particularly useful in situations where it is difficult to record the division of interests on title (such as artwork). Despite its legal potency, creat- ing a CRT is simply a matter of signing the appropriate legal documents. When a donor creates a CRT, they dis- pose of the residual interest in the prop- erty to the trust and then donates the certain rights in the trust to the charity (the “capital interest”). It is important to note that the donation in this case occurs when the owner transfers the interest in the trust to the charity. Thus, if the underlying property is, for exam- ple, publicly-traded securities, the gift of an interest in the trust will not attract the same favourable tax treatment as donating the securities would have; it is a donation of an interest in a trust, not of securities. The special tax treatment assigned to different types of property outlined else- where in this chapter (i.e. ecological property, publicly-traded securities, or certified cultural property) likely makes them inappropriate candidates for this type of donation. It is important not to create the trust with the charity as the beneficiary, because if the donor is not careful, they will gift an interest in the trust with no property (and thus no value on the receipt), and any subsequent disposition to the trust will not be considered a gift by the CRA. The appropriate method is instead to create the trust with the donor holding both interests in the trust. The donor then contributes the assets to the trust, and finally donates the capital interest to the charity. Of course, the donor would retain the income interest as long as is set out in the trust deed. GIFTS TO U.S. CHARITIES Individuals who reside in Canada and commute to their employment or place of business in the United States are allowed to deduct donations made to U.S. charitable organizations on the same terms as donations made to Canadian organizations. There are, however, several other important conditions which must be met. Firstly, the commuter must live near the American border during the whole of the taxation year. Secondly, their U.S. employment or business income must represent the donor’s chief source of income for that year. Thirdly, the donor must be able to demonstrate that the gift was made to a religious, charitable, scientific, literary or educa- tional organization created or organized in or under the laws of the United States. Finally, they must be able to demonstrate that such a gift would be allowed as a deduction under the United States Internal Revenue Code. Where all those conditions are met, the donations in question are treated as donations made to a registered charity. VOLUNTEER SERVICES The ITA makes it very clear that only a gift to a charity is receiptable. A gift includes property or a right to property. Unfortunately, services do not qualify as property and, therefore, are not receipt- able. GIFT BY WILL One legal requirement of a gift is actual delivery of the gift to the recipient. However, where a gift is made by Will, such delivery is impossible until after the death of the person– sometimes well after. Under normal circumstances, the gift would not be complete until deliv- ery is made. However, the law allows that where a gift is made by Will, it will be considered to have been made by the deceased in the few seconds preceding death, assuming of course that delivery occurs at some point after the death. In this way, the tax credits that are generat- ed by the donation can be applied to the donor’s year of death. This is particularly useful as there is often a large tax bill owing on death. The law allows for certain differences from a strict calculation perspective. As
