Here is how a charitable remainder trust can work. You transfer investments to a trustee, who will manage the investments. The terms of your trust agreement with the trustee provide that during your lifetime, the trustee pays you income, such as dividends and interest, from the investments. On your death, the trustee is required to pay the investments to a registered charity.
This is called a charitable remainder trust because it is a charitable gift, made through a trust, of what remains in the trust on your death.
The advantage of this type of arrangement is that you can get a tax receipt from the charity now, while getting interest income from the investments during your lifetime. The tax receipt allows you to get tax credits, reducing your tax burden.
The disadvantage is that to qualify for a charitable tax receipt, you cannot get any of the capital returned to you. If the trust agreement allows the trustee to pay you capital from the trust, then Canada Revenue Agency takes the position that the gift to the charity is not an eligible charitable gift. The reason is that if you could receive capital back, the charity might end up receiving significantly less than the amount you transferred to the trustee.
Although I have used investments as an example of the type of asset you can transfer to a charitable remainder trust, you can also contribute other types of assets such as works of art or land.
In the case of land, you can also transfer the land to the charity and take back a life estate. The life estate gives you the right to use the land during your lifetime.
You could also give a life interest in the charitable remainder trust to someone else, such as your spouse. For example, in your will you could create a trust that provides that your spouse gets all of the income during your spouse’s lifetime, with the capital going to the charity on your spouse’s death.
Perhaps the trickiest part of charitable remainder trust is determining the value of the charitable gift when you create the trust. For example, if you transfer a half-million dollars to a trustee who pays the income to you for your lifetime, the charity will issue you a receipt for a lesser amount. The reason for this is that a half-million dollars twenty years from now is not worth the same as a half-million dollars today. To determine the amount of your tax receipt, the charity will have to take into account your life-expectancy and interest rates. The younger you are, the lesser the amount of the charitable tax receipt.
Canada Revenue Agency has issued Interpretation Bulletin IT-226, “Gift to a Charity of a Residual Interest in Real Property or an Equitable Interest in a Trust,” which deals with the Canada Revenue Agency’s requirements in greater detail.