The Price of Kindness: Enjoy Today, Give Tomorrow
Photo Credit: First Citizen Bank
By: Ken Lee, PFA | KLee Tax and Financial Services Co.
Published: 12 Janurary 2026 11:00PM EST
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Good morning Toronto! Many Canadians may not want to wait till their deaths to make a gift to a charity. These same Canadians who want to make a life gift may not be willing to give up the income or control that the asset currently provides. In these cases, a charitable remainder trust can be an effective compromise. Today's article will explain what the CRT is, as well as the CRA and the law’s position.
Unlike jurisdictions such as the United States, which provide a codified statutory definition of a charitable remainder trust (CRT) (see 26 C.F.R. § 1.664-1), Canada lacks such a definition. Instead, what constitutes a CRT in Canadian tax law has been construed through Revenue Canada's administrative positions, technical interpretations, and some judicial precedent.
A CRT is still a normal trust where assets must be settled or transferred into the trust. However, the donor (or another beneficiary) typically retains the right to use the asset or to receive income from the asset for their lifespan — or fixed term (‘life interest’). After the term, a registered charity would become entitled to whatever remains of the asset (‘residual interest’). It is important to note that, as a part of this arrangement, the asset remains the property of the trust during the donor's lifetime— the charity does not receive ownership until the donors’ life interest or term interest is fully satisfied (death).
In my previous article, The Price of Kindness: Charitable Contributions, I noted that one condition of a 'gift' existing for tax purposes was that the property in question had been voluntarily transferred by the donor. In a normal gift, this would imply that post-transfer, the donor has no right to any benefits of the property. By logic, property within a CRT would not qualify as a ‘gift’.
Notwithstanding this apparent contradiction, while the CRA does not treat the donor as giving the underlying property to the charity immediately—as with a traditional gift—they consider the donor to be giving the charity a present interest in the future value of the property. For tax purposes, it is therefore critical that the charity’s right to receive the remainder of the asset is ironclad. Thus, the CRA will consider a residual interest to have been gifted if ALL of the following requirements are met:
- There must be a transfer of property from the donor to a trust; AND
- The property in the trust vests with the charity at the time of the transfer (there may NOT be a vesting period); AND
- The transfer is irrevocable (the donor cannot ‘change’ their mind)
Example 1
Most of Harry's money is in mutual funds. Unfortunately, Harry was recently diagnosed with terminal cancer and does not expect to live for more than a couple years. Harry is considering transferring these mutual funds into a CRT, where he would still be entitled to dividend distributions for the balance of his life. After his death, the mutual funds would go to a hospital. However, he wants the ability to revoke his gift in the event he suddenly recovers.
- If Harry were to settle a trust, given that the gift is revocable, a residual interest would NOT have been deemed to be gifted as one of the conditions was not satisfied.
Where the above conditions are met, the charity is empowered to issue a donation tax receipt. However, it would be improper to issue a donation receipt for the full value of the transferred property. Given the donor's life interest, the tax-deductible amount is actually limited to the present value of the charity's remainder interest.
This is easier said than done — determining the present value of the charity's interest is not straightforward. Generally, depending on the asset type, an actuarial report will be required for valuation purposes. This report considers, amongst other factors, the donor's life expectancy, long-term expected investment returns, and a discount rate. As a function of the Time Value of Money, the longer the donor's life expectancy, the smaller the present value and resulting donation receipt.
Example 2
Annika is a healthy 25-year-old. Recently, she won the Lotto Max grand prize — $80 million! She has been considering investing half of this amount into a CRT, and has come to her tax planner, Ken, for advice.
- After considering Annika’s goals and life stage, Ken advised that the present value of the charity’s interest would be extremely low in relation to the donation, accounting for Annika’s long expected lifespan.
- Settling a CRT would not be the most tax-efficient option for Annika.
Example 3
Referring to Example 2, Annika has commissioned an actuarial study, and it was concluded that the present value of the charity’s interest in the $40m was only $15 million. Against Ken’s suggestion, Annika settles a CRT. The day after settling the CRT, Annika suddenly dies.
- Annika would only get a donation receipt for $15 million, regardless of her death, which allowed the charity to receive the $40m much sooner than expected.
Author’s comments: An actuarial study, at the end of the day, is only a prediction. The donor may horribly outlive or underlive (as is the case) the assumptions used in the calculation, meaning the actual timing and size of the tax benefit may significantly differ. In my opinion, I would only consider a CRT for those in their later stages of life or those with reduced life expectancy. - Ken
Normally, property transferred into a CRT is treated as a deemed disposition of the entire property at FMV, which would trigger any latent capital losses/gains on the full value of the property, in spite of only part of the property actually being 'donated'. Taxpayers can make a subsection 118.1(6) election, which would allow the capital gains to be calculated based on the difference between the ACB and the FMV of purely the life interest. The remainder interest would still be treated as a gift.
Income that is generated from the life interest, as with other trusts, must be distributed to the beneficiaries to avoid the trust being taxed at the highest marginal brackets. Similarly, the distributed income is taxable in the beneficiary’s hands, with the character of the income (i.e. dividends or interest) being fully retained.
In conclusion, a charitable remainder trust is an excellent way for certain individuals to make a gift to a charity, enjoy the tax benefits now, and still enjoy the benefit of the money. However, care must be taken to assess a CRT’s suitability for younger donors, given the uncertainties of the current calculation method. In all, the CRT regime in Canada would benefit from an amendment to the Act that organizes all of the CRA’s guidance into easily accessible law.
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