A residual interest gift is an arrangement where a donor irrevocably gives real estate or personal property to a charity while retaining the right to use the property for life or for a term of years.
| Jonathan Grant |
Benefits to you?
- As a donor you retain the right to use the property with the ability to continue using it as before, with no impact on your lifestyle. If married you could retain use for your lifetime and also for the lifetime of your surviving spouse. Alternatively, use could be retained for a certain period of time.
- When the property’s title passes to the organization (with your life or other interest registered on title), you receive an immediate donation receipt for the present value of the donated residual interest.
- If the use of the property is retained by you only, or by you and your spouse, you must recognize only the portion of the capital gain allocable to the donated residual interest. There is no taxable capital gain when you give a residual interest in a principal residence.
- The gift removes the donated property from your estate, resulting in lower probate and other estate-related fees in the future. Also, your wishes are less susceptible to challenge by heirs than if you had made a bequest.
| Gary Tipper |
Who can give gifts of residual interest?
This gift appeals primarily to upper-income donors 60 years of age plus, with the optimum being 75 years of age or older. Usually the donor has extensive holdings and may be planning a bequest to a favourite cause but would like to reduce income tax in the present year without any change in personal living standards.
A donor may wish to donate a residual interest in the donor’s principal residence, recreational property or other real estate that the donor wants to see preserved.
How do I make such a gift?
The property is appraised and the value of the residual interest is determined. Legal documents are signed by the donor and the organization and filed in the Land Title office. The organization (if it is a registered charity) issues a donation receipt for the present value of the donated residual interest. If appreciated property is donated, the amount of the capital gains must also be calculated.
The property vests in the organization, subject to the life interest retained by the donor. Upon the donor’s death (if only the donor was given the right to use the property) or expiration of the term of years, the donor’s right to use the property ceases. The organization then has complete control of the property.
| Janice Link |
Important considerations
Residual interest gifts are irrevocable. The donor cannot regain title to the property. The property has been removed from the donor’s estate and will not pass to other beneficiaries.
Valuations can be a sensitive issue. Use an appraiser to value the property. Use an actuary to calculate the donation receipt. Valuations of the property, life interest and residual interest may be reviewed by Canada Revenue Agency.
Check with the organization in advance regarding its policies about acceptance of such gifts, including policies regarding who is responsible for upkeep/repairs, property taxes, insurance, etc. while the life interest is in existence.
| David Denning |
Planned gifts can provide beneficial results for a donor but, in order to ensure that all relevant issues have been considered and addressed and that all Income Tax Act, Canada provisions and regulations are met, prospective donors should seek qualified legal and accounting advice.
Give Green Canada acknowledges and thanks Lorna Somers and Frank Minton for pre-approving the use of their book Planned Giving for Canadians as the basis for the information provided about different types of gifts.
