June 22, 2011

Terrorism and use of intermediaries to carry out charitable activities?

It is pretty obvious that Canadian charities, whether operating in Canada or outside of Canada, cannot directly or indirectly support terrorism.  Canada has anti-terrorism legislation and charities should due due diligence before transfering assets to non-profits and other entities both in Canada and abroad.

In CRA’s Guidance “Using an Intermediary to Carry out a Charity’s Activities within Canada” it notes:

“2.1. What do charities need to know about Canada’s anti-terrorism legislation?
Charities must remember their obligations under Canada’s anti-terrorism legislation. As with all individuals and organizations in Canada, charities are responsible for making sure that they do not operate in association with individuals or groups that are engaged in terrorist activities or that support terrorist activities.

The CRA has produced a checklist to help Canadian charities identify vulnerabilities to terrorist abuse.

Under the Charities Registration (Security Information) Act and the Income Tax Act, a charity’s status may be revoked if it operates in such a way as to make its resources available, either directly or indirectly, to an entity that is a listed entity as defined in subsection 83.01(1) of the Criminal Code; or to any other entity (person, group, trust, partnership, or fund, or an unincorporated association or organization) that engages in terrorist activities or activities in support of them.

There are other prohibitions on funding or otherwise facilitating terrorism. For more information, see the Criminal Code, the Regulations Implementing the United Nations Resolutions on the Suppression of Terrorism, and the United Nations Al-Qaeda and Taliban Regulations, as well as the Charities Directorate’s Web page Charities in the International Context.”

For more information on the CRA Guidance “Using an Intermediary to Carry out a Charity’s Activities within Canada” (Reference number CG-004) see:
http://www.canadiancharitylaw.ca/index.php/blog/category/using_intermediaries_in_canada/ or
http://www.cra-arc.gc.ca/chrts-gvng/chrts/plcy/cgd/ntrmdry-eng.html

December 13, 2010

CRA letter on Canadian charities and alter ego trusts

Here is a recent CRA letter dealing with “If, as a consequence of a gift, a charity holds a beneficial interest in an alter ego trust, will the restriction in subsection 118.1(13) apply in respect of the gift?”

LANGIND E
DOCNUM 2010-0369261E5
AUTHOR Duval, Kimberly
DESCKEY 25
RATEKEY 2
REFDATE 101122
SUBJECT alter ego trust and charity
SECTION 118.1(13), 118.1(18)
SECTION
SECTION
SECTION
$$$$

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.

Prenez note que ce document, bien qu’exact au moment émis, peut ne pas représenter la position actuelle de l’ARC.

 
PRINCIPAL ISSUES:    If, as a consequence of a gift, a charity holds a beneficial interest in an alter ego trust, will the restriction in subsection 118.1(13) apply in respect of the gift?

POSITION:      Question of fact.  It depends on whether the property held by the donor was a non-qualifying security of the donor within the meaning of subsection 118.1(18).

REASONS:    The restriction in subsection 118.1(13) applies in respect of a gift of a non-qualifying security of the donor.

 
XXXXXXXXXX

                                                                        2010-036926

                                                                        Kimberly Duval

                                                                        (613) 957-8585

November 22, 2010

Dear XXXXXXXXXX :

Re:  An interest in an alter ego trust and a non-qualifying security

This is in response to your e-mail correspondence of May 17, 2010 requesting some further commentary from us in regards to our recent response to Question 7 at the 2010 CALU conference.  Specifically, you have asked that we consider whether subsection 118.1(13) of the Income Tax Act (the “Act”) would apply to limit an individual’s claim for a donation tax credit under subsection 118.1(3) of the Act if a registered charity holds a beneficial interest in a trust (e.g., an alter ego trust) that is, immediately after the time of the gift, affiliated with the individual who made the gift.

Our Comments

The “non-qualifying security rules” in subsection 118.1(13) were originally introduced to defer the opportunity for certain donors (individuals not dealing at arm’s length with their corporations) to receive a tax benefit by making gifts to a qualified donee of securities in those corporations. Under these rules, the tax benefit associated with the making of a charitable gift is generally restricted unless and until the donee disposes of the security or the security ceases to be a non-qualifying security.

Until March of 2007, subsection 118.1(18) of the Act defined a non-qualifying security of an individual at any time to be an obligation of the individual or a non-arm’s length person, a share issued by a corporation with which the individual does not immediately after that time deal at arm’s length or any other security issued by the individual or a non-arm’s length person (subject to certain exceptions). The definition was then extended to include paragraph (b.1) which refers to a beneficial interest in a trust that is immediately after that time affiliated with the individual or the individual’s estate, or a beneficial interest in a trust if the trust immediately after that time holds a non-qualifying security of the individual or estate (or held, at or before that time, a share that is such a non-qualifying security, and that is, after that time, held by the charity). 

Where an individual makes a gift of property to a charity that is a non-qualifying security of the individual (and the gift is not an excepted gift), the gift is deemed not to have been made at that time, pursuant to subsection 118.1(13).  As such, in our view, it is the nature of the property to the donor that determines whether the restriction in subsection 118.1(13) will apply in respect of a particular gift.

For purposes of the gifting rules, Interpretation Bulletin IT-226R addresses how subsection 118.1(3) applies in certain arrangements where the property of the donor (for example, property transferred to a trust having a charity as a capital beneficiary) is not the same property as that received by the charity at that time, which is the equitable interest in the trust.  However, it is our view that the potential application of subsection 118.1(13) to such arrangements would be dependent upon whether the property of the donor would be considered a non-qualifying security of the donor at the time of the gift, within the meaning set out in subsection 118.1(18). 

As such, it would ultimately be a question of fact whether the restriction in subsection 118.1(13) would apply in a situation where an individual settles an alter ego trust having a registered charity as the capital beneficiary, based on the nature of the property so transferred on settlement of the trust.  By way of example, subsection 118.1(13) would apply where a donor transferred to such an alter ego trust a share of a corporation that was immediately after that time a corporation with whom the donor was not dealing at arm’s length.  Similarly, if a donor transferred a beneficial interest of the donor in a trust that was, immediately after that time, affiliated with the donor, subsection 118.1(13) would also apply. 

This position is consistent with the views expressed by officials of the Department of Finance at the 2009 APFF. 

We trust our comments will be of assistance to you.

Yours truly,

 

 

Robin Maley

for Division Director

Business and Partnership Division

Income Tax Rulings Directorate

Legislative Policy and Regulatory Affairs Branch

November 12, 2010

Determining the “Cost” of Life Insurance Policies as a Charitable Gift when transfer to charity

Here is a letter from CRA in response to a question about valuing a life insurance policy when it is transferred from a non-arm’s length person to a donor and subsequently gifted to a qualified donee.  It deals with the deemed fair market value rules.  Determining_the_Cost_of_Life_Insurance_Policies_as_a_Charitable_Gift.pdf

LANGIND E
DOCNUM 2010-0363091C6
AUTHOR Danis, Sylvie
DESCKEY 20
RATEKEY 2
REFDATE 100608
SUBJECT Gift of an interest in a life insurance policy
SECTION 248(35), 248(36), 148(9) and 148(7)
SECTION
SECTION
SECTION
$$$$
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu’exact au moment émis, peut ne pas représenter la position actuelle de l’ARC.
PRINCIPAL ISSUES: An interest in a life insurance policy is transferred from a non-arm’s length person to a donor and subsequently gifted to a qualified donee. Where the gift is subject to proposed subparagraph 248(35)(b)(i) or (ii) and proposed subsection 248(36), what is the deemed FMV of the gift?
POSITION: The deemed FMV of the gift will be determined based on the lesser of the cost of the interest in the life insurance policy to the donor and the cost of the interest in the policy to the non-arm’s length person immediately before the interest in the policy was disposed of by that person.  It is the CRA’s view that the ACB of an interest in a life insurance policy is generally a reasonable proxy for the “cost” of an interest in a policy.  Where subsection 148(7) has applied to deem the cost of an interest in a policy to be the value of the interest in the policy, this adjustment will be relevant in the determination of the ACB of the interest in the policy and the fair market value of a gift pursuant to proposed subparagraph 248(35)(b)(i) or (ii).
REASONS: Legislation

STEP CRA Roundtable - 2010
Question 4:
Determining the “Cost” of Life Insurance Policies as a Charitable Gift
Proposed subsections 248(35) to (37) set out special rules for determining the FMV of a property that is subject to a charitable gift for purposes of determining the eligible amount of a gift under subsection 248(31).  Proposed paragraph 248(35)(b) provides that the FMV of the gifted property is deemed to be the lesser of its FMV otherwise determined and its cost, or in the case of capital property, its adjusted cost base (“ACB”) immediately before the gift is made, if one of two conditions are met:
(i) The taxpayer acquired the property that is the subject of the gift less than three years before the day that the gift is made (except if the gift is made as a consequence of death), or
(ii) The taxpayer acquired the property that is the subject of the gift less than ten years before the day that the gift is made (except if the gift is made as a consequence of death) and it is reasonable to conclude that, at the time the taxpayer acquired the gifted property, one of the main reasons for its acquisition was to make the gift.
Proposed subsection 248(37) excludes several types of gifts from the application of subsection 248(35).  However, a gift of an interest in a life insurance policy is not excluded from the proposed application of subsection 248(35).
During the CLHIA Roundtable in May 2009, the CRA confirmed that proposed subsection 248(35) could apply to the gift of an interest in a life insurance policy such that the amount that may be receipted would be the lesser of policy’s “cost” and its FMV.
Could the CRA provide further guidance as to what factors it would consider in determining the cost of an interest in a life insurance policy for purposes of proposed subsection 248(35)?  For example, could the CRA comment on the transfer of an interest in a life insurance policy that is personally owned to a wholly-owned corporation, where the policy has a FMV of $300,000, and no cash surrender value (“CSV”).  The deeming rule in subsection 148(7) provides that such a transfer between non-arm’s length parties is deemed to occur at CSV or zero in this case.  Therefore, where the deemed cost of the interest in the policy to the corporation is zero, but its FMV is $300,000 and subsection 248(35) applies, would the CRA allow the gift which occurs immediately after the transfer to take place at $300,000?
The FMV of an interest in a life insurance policy otherwise determined and the cost of that interest must be considered in applying proposed subsection 248(35) to a gift of an interest in a life insurance policy to a qualified donee.
As stated by the CRA at the CLHIA Roundtable in May 2009, we recognize that the Income Tax Act (the “Act”) does not specifically define the cost of an interest in a life insurance policy and we have brought this to the attention of the Department of Finance for their consideration.
The “adjusted cost basis” to a policyholder of an interest in a life insurance policy is determined by a formula under subsection 148(9).  In general terms, the adjusted cost basis to the original policyholder will be the amount by which the cash premiums paid by the policyholder (excluding premiums for accidental death benefits), and any income in respect of the interest in the policy that has previously been reported for tax purposes, exceeds the “net cost of pure insurance” under the policy.
It is our view that the adjusted cost basis of an interest in a life insurance policy, as defined in subsection 148(9), would generally be a reasonable proxy for the “cost” of an interest in a life insurance policy for purposes of the deemed FMV of a policy under proposed subsections 248(35) and 248(36).
Where subparagraph 248(35)(b)(i) or (ii) applies to the gift of an interest in a life insurance policy, the FMV of the interest in the policy to the donor is deemed to be the lesser of its FMV otherwise determined and its cost, and where a person dealing non-arm’s length with the donor had acquired the same property within the relevant time, subsection 248(36) will apply to deem the cost of the interest in the life insurance policy for purposes of subsection 248(35) to be the lesser of the cost to the donor at the time of the gift or the cost to the non-arm’s length person immediately before the interest in the policy was disposed of by that person.
Where subsection 148(7) applies to deem the cost of the interest in the policy held by the donor to be the CSV and the CSV of that policy is NIL, the deemed FMV of the interest gifted will be deemed to be the lowest of its cost to the donor at the time of the gift, which is NIL, or the cost to the non-arm’s length person immediately before the interest in the policy was disposed of by that person.  In the example provided, since the cost of the interest in the policy to the donor is deemed to be NIL, the deemed FMV of the gift of the interest in the life insurance policy will also be NIL.
[Note:  On July 16, 2010, the Department of Finance released draft legislative proposals to implement outstanding income tax technical measures.  Included in the proposals is an amendment to proposed subsection 248(35) to refer to the adjusted cost basis of a life insurance policy.]

Sylvie Danis
2010-036309
June 8, 2010

July 12, 2010

What is “cost” of life insurance when donating to registered charity?

In this letter CRA discusses “Whether the adjusted cost basis is a reasonable proxy for “cost” of an interest in a life insurance policy in applying the deeming provisions of 248(35) with respect to a gift to a qualified donee in certain circumstances.”

LANGIND E
DOCNUM 2010-0359391C6
AUTHOR Danis, Sylvie
DESCKEY 20
RATEKEY 2
REFDATE 100504
SUBJECT Cost of interest life insurance policy 248(35)
SECTION 248(35)
SECTION
SECTION
SECTION
$$$$

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu’exact au moment émis, peut ne pas représenter la position actuelle de l’ARC.

PRINCIPAL ISSUES: Whether the adjusted cost basis is a reasonable proxy for “cost” of an interest in a life insurance policy in applying the deeming provisions of 248(35) with respect to a gift to a qualified donee in certain circumstances.
POSITION:  Yes, generally.
REASONS:  There is no definition of “cost” for interests in life insurance policies in the Act. 

CALU CRA Roundtable - 2010

Question 6: Determining the “Cost” of Life Insurance Policies as a Charitable Gift

Proposed subsections 248(35) to (37) of the Act set out special rules for determining the fair market value (FMV) of a property that is subject to a charitable gift for purposes of determining the eligible amount of a gift under subsection 248(31).  Proposed paragraph 248(35)(b) provides that the FMV of the gifted property is deemed to be the lesser of its FMV otherwise determined and its cost, or in the case of capital property its adjusted cost base immediately before the gift is made, if one of two conditions are met:

(i)  The taxpayer acquired the property that is the subject of the gift less than three years before the day that the gift is made (except if the gift is made as a consequence of death), or

(ii)  The taxpayer acquired the property that is the subject of the gift less than ten years before the day that the gift is made (except if the gift is made as a consequence of death) and it is reasonable to conclude that, at the time the taxpayer acquired the gifted property, one of the main reasons for its acquisition was to make the gift.

Proposed subsection 248(37) excludes several types of gifts from the application of subsection 248(35).  However, gifts of interests in life insurance policies are not excluded from the proposed application of subsection 248(35). 

During the CLHIA Roundtable in May 2009, the CRA confirmed that proposed subsection 248(35) could apply to the gift of an interest in a life insurance policy such that the amount that can be receipted would be the lesser of the policy’s “cost” and “fair market value”.

In the commentary provided by the CRA it was stated:

“The cost of a life insurance policy is a factual determination.  While premiums paid to acquire and maintain a life insurance policy may reflect the cost, this may not always be the case.  We recognize that the Act does not specifically define the cost of a life insurance policy and we have brought this to the attention of the Department of Finance for consideration.”

Where proposed subsection 248(35) is applicable, the draft legislation indicates the fair market value of a property in certain situations is deemed to be the lesser of the fair market value of the property otherwise determined and the cost.  However, in the case of capital property, the fair market value is deemed to be the lesser of the fair market value otherwise determined and the adjusted cost base of the property immediately before the gift is made.  Similarly, it would appear that the “adjusted cost basis” of an interest in an insurance policy is a much better proxy for the “cost” of an interest in an insurance policy as it reflects a number of transactions with respect to the policy including the payment of premiums. 

While this legislation has yet to be enacted it is stated to be effective in respect of gifts made after 6:00 pm (EST), December 5, 2003, and most donors and charities have been operating as if this draft legislation is in effect.  Therefore, it is important to have greater certainty in determining the “cost” of an interest in a insurance policy for purposes of subsection 248(35).

Question:

Could the CRA provide further guidance as to what factors it would consider in determining the “cost” of an interest in an insurance policy for purposes of proposed subsection 248(35). 

CRA’s Response

The fair market value of an interest in a life insurance policy otherwise determined and the cost of the interest in the policy must be considered in applying proposed subsection 248(35) of the Act to a gift of an interest in a life insurance policy to a qualified donee. 

As stated by the CRA at the CLHIA Roundtable in May 2009, we recognize that the Act does not specifically define the cost of an interest in a life insurance policy and we have brought this to the attention of the Department of Finance for their consideration. 

The “adjusted cost basis” (“ACB”) to a policyholder of an interest in a life insurance policy is determined by a formula under subsection 148(9) of the Act.  In general terms, the ACB to the original policyholder will be the amount by which the cash premiums paid by the policyholder (excluding premiums for accidental death benefits), and any income in respect of the policy that has previously been reported for tax purposes, exceeds the “net cost of pure insurance” (“NCPI”) under the policy. 

It is our view that the adjusted cost basis of an interest in a life insurance policy as defined in subsection 148(9) would generally be a reasonable proxy for the “cost” of an interest in a life insurance policy for purposes of the deemed fair market value of an interest in a policy under proposed subsection 248(35) of the Act. 

Sylvie Danis
2010-035939
May 4, 2010

June 03, 2010

Bequest giving in Canada - article by FLA Group on importance of bequest fundraising

Here is an article by FLA Group entitled “Legacy Marketing Overview March 2010”  The article has some interesting statistics and thoughts on the importance of encouraging bequest giving. I agree that Canadian charities do not spend enough time doing this type of planned gift and we are far behind places like the UK.  Hopefully this article will encourage some to put more time and resources into this area. 

http://www.theflagroup.com/articles/FLA-Legacy-Marketing-Overview-Mar-2010.pdf

June 01, 2010

Leaving a Bequest to a Canadian Charity - using a lawyer to avoid legal problems with bequests

Here is a short article Leaving a Bequest to a Canadian Charity - using a lawyer to avoid common legal problems with bequests - June 2010, which discusses the value of using an estate lawyer who is knowledgeable about bequests.

May 01, 2010

CRA letter on charitable donation of publicly listed shares and whether gift

Lengthy letter from CRA on “Whether donations to registered charities of shares listed on a designated stock exchange constitute gifts for the purpose of the deduction for gifts under subsection 110.1(1) of ITA?” and the answer is yes.

LANGIND E
DOCNUM 2009-0330511R3
AUTHOR XXXXXX
DESCKEY 30
RATEKEY 2
REFDATE 10XXXX
SUBJECT Charitable Donation of Publicly Listed Shares
SECTION 38(a.1), 83(2), 83(4), 85(1), 87(1), 110.1(1), 116
SECTION
SECTION
SECTION
$$$$
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu’exact au moment émis, peut ne pas représenter la position actuelle de l’ARC.
PRINCIPAL ISSUES: Whether donations to registered charities of shares listed on a designated stock exchange constitute gifts for the purpose of the deduction for gifts under subsection 110.1(1) of ITA?
POSITION: Yes.
REASONS: Meet the requirements of subsection 110.1(1) of ITA.
XXXXXXXXXX
XXXXXXXXXX , 2010
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
We are writing in response to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX and a new corporation described in paragraph 43 below.  We also acknowledge receipt of additional information you provided to us in your letters dated XXXXXXXXXX as well as additional information you provided to us during various telephone conversations (XXXXXXXXXX ) in connection with your ruling request.
In this letter, unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C., 1985 c.1 (5th Supp.), as amended (hereinafter the “Act”).
We understand that to the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling:
(i) is in an earlier return of the taxpayer(s) or a related person;
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer(s) or a related person;
(iii) is under objection by the taxpayer(s) or a related person;
(iv) is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has expired; and
(v) is the subject of a ruling previously issued by the Income Tax Rulings Directorate.
In this letter, except in paragraph 66, the names of the taxpayers will be referred to as follows:
XXXXXXXXXX
“Parent”
XXXXXXXXXX
“Child1”
XXXXXXXXXX
“Child2”
XXXXXXXXXX
“Child3”
XXXXXXXXXX
“Child4”
* Collectively, Child1, Child2, Child3 and Child4.
“Children”
* Collectively, Parent and the Children.
“Family”
XXXXXXXXXX
“Holdco1”
XXXXXXXXXX
“Holdco2”
XXXXXXXXXX
“Holdco3”
XXXXXXXXXX
“Foreignco1”
XXXXXXXXXX
“Foreignco2”
XXXXXXXXXX
“Foreignco3”
XXXXXXXXXX
“Group”
XXXXXXXXXX
XXXXXXXXXX
DEFINITIONS
In this letter, unless otherwise expressly stated, the following terms and expressions have the meanings specified and are replaced as follows:
* “Adjusted Cost Base” has the meaning assigned to the expression in section 54;
“ACB”
* “Agreed Amount” has the meaning assigned by subsection 85(1);
“Agreed Amount”
* “Capital Dividend Account” has the meaning assigned by subsection 89(1);
“CDA”
* “Capital Property” has the meaning assigned in section 54;
“Capital Property”
* Canada Business Corporations Act, R.S.C., 1985, c. C-44 and, where applicable, its predecessor statutes;
“CBCA”
* Canada Revenue Agency;
“CRA”
* “Designated Stock Exchange” has the meaning assigned by subsection 248(1), one of which is the XXXXXXXXXX Stock Exchange;
“Stock Exchange”
* Fair market value;
“FMV”
* XXXXXXXXXX
“FC”
* “Private Corporation” has the meaning assigned by subsection 89(1);
“Private Corporation”
* “Paid-up Capital” has the meaning assigned to the expression in subsection 89(1);
“PUC”
* “Proceeds of Disposition” has the meaning assigned by section 54;
“Proceeds of Disposition”
* “Qualified Donee” has the meaning assigned by subsection 149.1(1);
“Qualified Donee”
* “Refundable Dividend Tax On Hand” as the expression is defined in subsection 129(3);
“RDTOH”
* ” Registered charity” has the meaning assigned by subsection 248(1);
“Charity”
* “Taxable Canadian Corporation” has the meaning assigned by subsection 89(1);
“Taxable Canadian Corporation”
* “Taxation year” has the meaning assigned by subsection 249(1);
“Taxation Year”
* “Taxable Canadian Property” has the meaning assigned by subsection 248(1).
“Taxable Canadian Property”
Unless otherwise indicated in this letter, all dollar amounts referred to herein are in Canadian dollars.
Our understanding of the facts, proposed transactions and purposes of the proposed transactions is as follows:
FACTS
The Family
1. XXXXXXXXXX
2. Parent is a XXXXXXXXXX who founded and heads the Group.  Parent is actively involved with all major and strategic issues pertaining to Holdco1 and Holdco2 as well as their day to day management.
3. XXXXXXXXXX
4. Parent is the father of the Children.  All the Children are adults. 
5. XXXXXXXXXX
The Group
6. XXXXXXXXXX
Holdco1
7. Holdco1, which is governed by the CBCA, was incorporated under the laws of XXXXXXXXXX on XXXXXXXXXX and continued under the CBCA on XXXXXXXXXX . 
8. Holdco1 is a Private Corporation and a Taxable Canadian Corporation and its Taxation Year ends on XXXXXXXXXX .
9. Holdco1 is a holding company, its sole asset consists of all the issued and outstanding shares of Holdco2.
10. The share capital of Holdco1 consists of an unlimited number of class A and B common shares, and an unlimited number of class A, B, C and D preferred shares.  There are XXXXXXXXXX class A common shares and XXXXXXXXXX class A preferred shares issued and outstanding of the capital stock of Holdco1.  Among other rights, privileges and restrictions, the class A common shares of the capital stock of Holdco1 are voting and participating and the class A preferred shares of the capital stock of Holdco1 are voting, non-participating and redeemable.
11. The owners of the issued and outstanding shares of the capital stock of Holdco1 and the shares’ tax characteristics are as follows:
Shareholders
Shares
ACB
PUC
FMV
(approximately)
Parent
XXXXXXXX class A preferred shares
XXXXXXX
XXXXX
XXXXXXXX
XXXXXXXX class A common shares
XXXXXXX
XXXXX
XXXXXXXX
Child1
XXXXXXXX class A common shares
XXXXXXX
XXXXX
XXXXXXXX
Child2
XXXXXXXX class A common shares
XXXXXXX
XXXXX
XXXXXXXX
Child3
XXXXXXXX class A common shares
XXXXXXX
XXXXX
XXXXXXXX
Child4
XXXXXXXXX class A common shares
XXXXXXXX
XXXXXX
XXXXXXXX
Approximate Total FMV of the XXXXXXXXX class A common shares
$ XXXXXX 1
1 For the purposes hereof, it will be assumed that the total FMV of all the class A common shares of the capital stock of Holdco1 is $XXXXXXXXXX .  The actual approximate total FVM of all the issued and outstanding class A common shares of the capital stock of Hodco1 is estimated to be in the range of $ XXXXXXXXXX and $ XXXXXXXXXX .
12. From XXXXXXXXXX to sometime in XXXXXXXXXX , Parent owned all of the XXXXXXXXXX issued and outstanding class A common shares of the capital stock of Holdco1 (XXXXXXXXXX ). 
13. In XXXXXXXXXX , the Children acquired from Parent the class A common shares of the capital stock of Holdco1 they own.
14. Parent has owned the XXXXXXXXXX class A preferred shares of the capital stock of Holdco1 since sometime in XXXXXXXXXX .  At that time, Parent subscribed to XXXXXXXXXX class A preferred shares of the capital stock of Holdco1, for which he paid $XXXXXXXXXX cash, and received from Holdco1 XXXXXXXXXX class A preferred shares of the capital stock of Holdco1 as consideration for transferring to Holdco1 the XXXXXXXXXX issued and outstanding class A common shares of the capital stock of Holdco2 he owned.  At that time, the FMV of the XXXXXXXXXX issued and outstanding class A common shares of capital stock of Holdco2 was nominal as the FMV of Holdco2’s sole asset (consisting of shares of the capital stock of Foreignco1) was equal to its liabilities.
15. Parent controls Holdco1 for the purposes of the Act.
16. Parent and the Children hold their shares of the capital stock of Holdco1 as Capital Property.  For Child1, the shares of the capital stock of Holdco1 it owns are Taxable Canadian Property.
17. Holdco1 does not have a CDA or RDTOH.
Holdco2
18. Holdco2, which is governed by the CBCA, was incorporated under the laws of XXXXXXXXXX on XXXXXXXXXX and continued under the CBCA on XXXXXXXXXX . 
19. Holdco2 is a Private Corporation and a Taxable Canadian Corporation and its Taxation Year ends on XXXXXXXXXX .
20. Holdco2 is a holding company.  Holdco2’s main asset consists of all the issued and outstanding shares of the capital stock of Foreignco1.  Holdco2 also owns all the issued and outstanding shares of the capital stock of Holdco3 (XXXXXXXXXX ) and other assets valued at approximately $ XXXXXXXXXX .  Holdco2 has liabilities of approximately $ XXXXXXXXXX .
21. The share capital of Holdco2 consists of an unlimited number of class A and B common shares, and an unlimited number of class A, B, C and D preferred shares. 
22. Since its incorporation, Holdco2 has had the same XXXXXXXXXX class A common shares of its capital stock issued and outstanding.
23. Holdco1 owns the XXXXXXXXXX issued and outstanding class A common shares of the capital stock of Holdco2 since sometime in XXXXXXXXXX for having acquired them from Parent the only previous owner of the said shares.  The XXXXXXXXXX class A common shares of the capital stock of Holdco2 have an ACB and a PUC of $ XXXXXXXXXX and an approximate FMV in the range of $XXXXXXXXXX and $ XXXXXXXXXX .  For the purposes hereof, it will be assumed that the FMV of the issued and outstanding shares of the capital stock of Holdco2 is $XXXXXXXXXX
24. Holdco1 holds the shares of the capital stock of Holdco2 as Capital Property.
25. As of XXXXXXXXXX , Holdco2 had a CDA of $XXXXXXXXXX and no RDTOH.
Foreignco1
26. Foreignco1 was incorporated on XXXXXXXXXX and is governed by the laws of XXXXXXXXXX .
27. Foreignco1 is a holding corporation as well as a XXXXXXXXXX .  Among other holdings, Foreignco1 owns XXXXXXXXXX % of the shares of the capital stock of Foreignco2.  XXXXXXXXXX  
28. The issued and outstanding shares of the capital stock of Foreignco1 has been the same since XXXXXXXXXX at which time Foreignco1 issued XXXXXXXXXX class A (participating, non-voting, non-redeemable and non-retractable) common shares and XXXXXXXXXX (participating and voting) common shares of its capital stock.  The approximate total FMV of the issued and outstanding class A common shares and common shares of the capital stock of Foreignco1 is in the range of $ XXXXXXXXXX and $ XXXXXXXXXX .  For the purposes hereof, it will be assumed that the FMV of all the issued and outstanding shares of the capital stock of Foreignco1 is $XXXXXXXXXX .  The FMV per share of the class A common shares and the common shares of the capital stock of Foreignco1 is identical.
29. Holdco2 has always owned all the issued and outstanding class A common shares of the capital stock of Foreignco1 having an ACB of $XXXXXXXXXX and a par value of XXXXXXXXXX per share.  Since XXXXXXXXXX , Holdco2 owns all the issued and outstanding common shares of the capital stock of Foreignco1 having an ACB of $ XXXXXXXXXX and a par value of XXXXXXXXXX per share.
30. From XXXXXXXXXX to XXXXXXXXXX , Holdco2 and an XXXXXXXXXX resident owned respectively XXXXXXXXXX and XXXXXXXXXX of the issued and outstanding common shares of the capital stock of Foreignco1.  Holdco2 subscribed for the XXXXXXXXXX common shares of the capital stock of Foreignco1 for $XXXXXXXXXX .
31. From XXXXXXXXXX to XXXXXXXXXX , XXXXXXXXXX owned the XXXXXXXXXX common shares of the capital stock of Foreignco1 for having acquired them from the XXXXXXXXXX resident on XXXXXXXXXX . 
32. On XXXXXXXXXX , Holdco2 acquired from XXXXXXXXXX the XXXXXXXXXX common shares of the capital stock of Foreignco1 at a price of $XXXXXXXXXX .
33. Holdco2 holds the shares of the capital stock of Foreignco1as Capital Property.
34. XXXXXXXXXX
35. XXXXXXXXXX
36. XXXXXXXXXX
Foreignco2
37. Foreignco2 is a corporation governed by the laws of XXXXXXXXXX .
38. Foreignco2 is a holding corporation as well as XXXXXXXXXX .  Foreignco2 owns a controlling interest in Foreignco3.
39. Foreignco1 has owned XXXXXXXXXX % of the shares of the capital stock of Foreignco2 since XXXXXXXXXX , when it acquired them from Holdco2 in order to better consolidate the XXXXXXXXXX corporate operations.  XXXXXXXXXX . 
Foreignco3
40. XXXXXXXXXX
XXXXXXXXXX
41. The shares of Foreignco3 are listed on a Stock Exchange.  In XXXXXXXXXX , Foreignco2 acquired approximately XXXXXXXXXX % of the shares of the capital stock of Foreignco3.
PURPOSES OF THE PROPOSED TRANSACTIONS
42. The purpose of the proposed transactions is to gift a portion of the shares of Foreignco1 to one or more Charities and for Parent and Child4 to thereafter make a gift of a substantial part of their respective interests in Amalco to Child1, Child2 and Child3. XXXXXXXXXX .
PROPOSED TRANSACTIONS
43. Holdco1 and Holdco2 (hereinafter “Predecessor corporations”) will amalgamate under the provisions of the CBCA to form Amalco.
44. The authorized share capital of Amalco will consist of an unlimited number of class A and class B common shares, and an unlimited number of class A, B, C, D and E preferred shares.  Among other rights and privileges, the class A common shares will be voting and participating, the class A preferred shares will be voting, non-participating and redeemable, and, the class D preferred shares and the class E preferred shares will both be non-voting, non-participating, redeemable and retractable.  Amalco’s statutes will provide for a price adjustment clause in respect of its classes A, D and E preferred shares.
45. The Predecessor corporations will amalgamate under the provisions of the CBCA to form Amalco in such manner that on and by virtue of the amalgamation:
(a) all of the property (except any amounts receivable from, or shares of the capital stock of, any Predecessor corporation) of the Predecessor corporations immediately before the merger will become property of Amalco;
(b) all of the liabilities (except any amounts payable to any Predecessor corporation) of the Predecessor corporations immediately before the merger will become liabilities of Amalco;
(c) all authorized but unissued shares of the capital stock of the Predecessor corporations will be cancelled;
(d) all issued and outstanding shares in the capital stock of Holdco2 that are owned by Holdco1 immediately prior to the merger will be cancelled for no consideration; and,
(e) all of the shareholders (except any Predecessor corporation) who owned shares of the capital stock of Holdco1 immediately before the merger, will receive shares of the capital stock of Amalco because of the merger, as described in paragraph 46 below.
46. As part of the amalgamation of the Predecessor corporations mentioned in paragraph 43 above;
* Each of the Children will exchange the XXXXXXXXXX class A common shares of the capital stock of Holdco1 it owns for XXXXXXXXXX class A common shares of the capital stock of Amalco;
* Parent will exchange his XXXXXXXXXX class A common shares of the capital stock of Holdco1 he owns for XXXXXXXXXX class A common shares of the capital stock of Amalco (and no other consideration); and,
* Parent will exchange his XXXXXXXXXX class A preferred shares of the capital stock of Holdco1 he owns for XXXXXXXXXX class A preferred shares of Amalco having a FMV equal to the FMV of the XXXXXXXXXX class A preferred shares of capital stock of Holdco1 so exchanged.
47. Amalco will be a Taxable Canadian Corporation and a Private Corporation.
48. Pursuant to paragraph 87(2)(z.1), for the purposes of computing the CDA of Amalco, Amalco will be deemed to be the same corporation as, and a continuation of, Holdco1 and Holdco2, such that Amalco will include in its CDA Holdco2’s CDA immediately before the amalgamation.
49. The shares of Foreignco1 will become publicly traded on a Stock Exchange.
50. Amalco will gift to one or more Charities that will be Qualified Donees approximately XXXXXXXXXX class A common shares and XXXXXXXXXX common shares of the capital stock of Foreignco1 (it is intended that the total FMV of the gifts will represent XXXXXXXXXX % of the FMV of Amalco being approximately $ XXXXXXXXXX on a total FMV of approximately $XXXXXXXXXX ).
51. Amalco will not designate an amount under subsection 110.1(3) (or proposed subsections 110.1(2.1) and (3) if enacted at the time of implementation of the proposed transactions) in respect of the gift(s) described paragraph 50 above.
52. Pursuant to paragraph 69(1)(b), as it relates to the gifts described in paragraph 50 above, Amalco will be deemed to have received proceeds of disposition for the Foreignco1 shares disposed by way of gift equal to the FMV of the said shares immediately before the gift (hereinafter “Proceeds of Disposition”). 
53. Amalco will realize a capital gain for a taxation year from the disposition of the Foreignco1 shares disposed in the year by way of gift described in paragraph 50 above (hereinafter “Gifted Shares”) equal to amount of the Proceeds of Disposition that exceeds the total ACB to Amalco of the Gifted Shares immediately before the disposition.
54. Parent will transfer to Amalco the XXXXXXXXXX class A common shares of the capital stock of Amalco he owns (representing XXXXXXXXXX % of the participating shares of Amalco) at their FMV immediately before the transfer (being approximately $ XXXXXXXXXX ) in exchange for XXXXXXXXXX class D preferred shares and XXXXXXXXXX class E preferred shares of the capital stock of Amalco.  Immediately after the transfer, the redemption value and the FMV of the XXXXXXXXXX class D preferred shares of the capital stock of Amalco will be equal to the FMV, immediately before the transfer, of the transferred XXXXXXXXXX class A common shares of the capital stock of Amalco minus $XXXXXXXXXX (hereinafter “Parent’s-Class D Redemption Value”), and, immediately after the transfer, the redemption value and the FMV of the XXXXXXXXXX class E preferred shares of the capital stock of Amalco, will be equal to the FMV, immediately before the transfer, of the transferred XXXXXXXXXX class A common shares of the capital stock of Amalco, minus Parent’s-Class D Redemption Value of the XXXXXXXXXX class D preferred shares of the capital stock of Amalco issued to Parent (hereinafter “Parent’s-Class E Redemption Value”).
55. Parent and Amalco will jointly elect, in prescribed form and within the time limits prescribed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the XXXXXXXXXX class A common shares of the capital stock of Amalco to Amalco.  The Agreed Amount in respect of the XXXXXXXXXX class A common shares of Amalco so transferred by Parent to Amalco will be equal to the ACB of such shares to Parent immediately before the exchange.  The Agreed Amount will be limited to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).
56. For the purposes of the CBCA, Amalco will add to the stated capital account maintained in respect of its class D preferred shares of its capital stock an amount equal to the aggregate PUC of the exchanged XXXXXXXXXX class A common shares of its capital stock immediately before the transfer minus $ XXXXXXXXXX , and, will add to the stated capital account maintained in respect of its class E preferred shares of its capital stock an amount of $ XXXXXXXXXX . 
57. In respect of the transfer described in paragraph 54 above, according to the price adjustment clause in Amalco’s statutes, if the tax authorities or a court of competent jurisdiction determine at any particular time (hereinafter “Adjustment Time”) that the FMV of the XXXXXXXXXX class A common shares of the capital stock of Amalco, immediately before the exchange, is greater than the FMV of the XXXXXXXXXX class D preferred shares and the XXXXXXXXXX class E preferred shares of the capital stock of Amalco, immediately after the transfer, as initially determined, then Amalco shall adjust the Parent’s-Class E Redemption Value of the XXXXXXXXXX class E preferred shares of its capital stock, in order to ensure that the aggregate redemption value and FMV, immediately after the transfer, of the XXXXXXXXXX class D preferred shares and the XXXXXXXXXX class E preferred shares issued to Parent is adjusted so as to equal the FMV so determined.  Furthermore, where dividends have been paid in respect of the class E preferred shares or where any class E preferred shares have been redeemed by Amalco prior to the Adjustment Time, payments shall be made by Amalco to give full effect to such adjustment.
58. Child4 will transfer to Amalco XXXXXXXXXX class A common shares of the capital stock of Amalco he owns (representing XXXXXXXXXX % of the participating shares of Amalco) at their FMV immediately before the transfer (being approximately $ XXXXXXXXXX ) in exchange for XXXXXXXXXX class D preferred shares and XXXXXXXXXX class E preferred shares of the capital stock of Amalco.  Immediately after the transfer, the redemption value and the FMV of the XXXXXXXXXX class D preferred shares of the capital stock of Amalco will be equal to the FMV, immediately before the transfer, of the transferred XXXXXXXXXX class A common shares of the capital stock of Amalco minus $XXXXXXXXXX (hereinafter “Child4’s-Class D Redemption Value”), and, immediately after the transfer, the redemption value and the FMV of the XXXXXXXXXX class E preferred shares of the capital stock of Amalco, will be equal to the FMV, immediately before the transfer, of the transferred XXXXXXXXXX class A common shares of the capital stock of Amalco minus Child4’s-Class D Redemption Value of the XXXXXXXXXX class D preferred shares of the capital stock of Amalco issued to Child4 (hereinafter “Child4’s-Class E Redemption Value”).
59. Child4 and Amalco will jointly elect, in prescribed form and within the time limits prescribed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the XXXXXXXXXX class A common shares of the capital stock of Amalco to Amalco.  The Agreed Amount in respect of the XXXXXXXXXX class A common shares of Amalco so transferred by Child4 to Amalco will be equal to the ACB of such shares to Child4 immediately before the exchange.  The Agreed Amount will be limited to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).
60. For the purposes of the CBCA, Amalco will add to the stated capital account maintained in respect of its class D preferred shares of its capital stock an amount equal to the aggregate PUC of the exchanged XXXXXXXXXX class A common shares of its capital stock immediately before the transfer minus $ XXXXXXXXXX , and will add to the stated capital account maintained in respect of its class E preferred shares of its capital stock an amount of $ XXXXXXXXXX . 
61. In respect of the transfer described in paragraph 58 above, according to the price adjustment clause in Amalco’s statutes, if the tax authorities or a court of competent jurisdiction determine at any particular time (hereinafter “Adjustment Time”) that
the FMV of the XXXXXXXXXX class A common shares of the capital stock of Amalco immediately before the exchange is greater than the FMV of the XXXXXXXXXX class D preferred shares and the XXXXXXXXXX class E preferred shares of the capital stock of Amalco, immediately after the transfer, as initially determined, then Amalco shall adjust the Child4’s-Class E Redemption Value of the XXXXXXXXXX class E preferred shares of its capital stock, in order to ensure that the aggregate redemption value and FMV, immediately after the transfer, of the XXXXXXXXXX class D preferred shares and the XXXXXXXXXX class E preferred shares issued to Child4 is adjusted so as to equal the FMV so determined.  Furthermore, where dividends have been paid in respect of the class E preferred shares or where any class E preferred shares have been redeemed by Amalco prior to the Adjustment Time, payments shall be made by Amalco to give full effect to such adjustment.
62. Amalco will redeem the XXXXXXXXXX class D preferred shares of its share capital owned by Parent for an amount equal to the aggregate of Parent’s-Class D Redemption Value of the class D preferred shares so redeemed.  The redemption value will be paid in full by Amalco by the issuance, in favour of Parent, of a series of three non-interest bearing promissory notes payable on demand having an aggregate principal amount and FMV equal to Parent’s-Class D Redemption Value of the class D preferred shares so redeemed which will be evidenced by three promissory notes having the same principal amount and FMV (hereinafter the “Amalco P Notes”).  Parent will accept the Amalco P Notes as full payment for the redemption value of his class D preferred shares of the capital stock of Amalco.
63. Amalco will redeem the XXXXXXXXXX class D preferred shares of its share capital owned by Child4 for an amount equal to the aggregate of Child4’s-Class D Redemption Value of the class D preferred shares so redeemed.  The redemption value will be paid in full by Amalco by the issuance, in favour of Child4, of a series of three non-interest bearing promissory notes payable on demand having an aggregate principal amount and FMV equal to Child4’s-Class D Redemption Value of the class D preferred shares so redeemed which will be evidenced by three promissory notes having the same principal amount and FMV (hereinafter the “Amalco C Notes”).  Child4 will accept the Amalco C Notes as full payment for the redemption value of his class D preferred shares of the capital stock of Amalco.
64. Amalco will elect in prescribed form and manner pursuant to subsection 83(2) that the full amount of any dividend, resulting from the redemption of shares described in paragraphs 62 and 63 above, be deemed to be paid out of Amalco’s CDA.
65. Parent will transfer by way of a gift an Amalco P Note to each of Child1, Child2 and Child3, and, Child4 will transfer by way of a gift an Amalco C Note to each of Child1, Child2 and Child3.
ADDITIONAL INFORMATION
66. The federal business number of the parties referred to herein, the location of the tax services office and taxation centre where their returns are filed, and the address of their head office are as follows:
XXXXXXXXXX
Address:
XXXXXXXXXX
Social Insurance Number :
XXXXXXXXXX
Tax Services Office:
XXXXXXXXXX
Taxation Centre: 
XXXXXXXXXX
XXXXXXXXXX
Address:
XXXXXXXXXX
Social Insurance Number :
XXXXXXXXXX
Tax Services Office:
XXXXXXXXXX
Taxation Centre: 
XXXXXXXXXX
XXXXXXXXXX
Address:
XXXXXXXXXX
Social Insurance Number :
XXXXXXXXXX
Tax Services Office:
XXXXXXXXXX
Taxation Centre: 
XXXXXXXXXX
XXXXXXXXXX
Address:
XXXXXXXXXX
Business Number:
XXXXXXXXXX
Tax Services Office:
XXXXXXXXXX
Taxation Centre: 
XXXXXXXXXX
XXXXXXXXXX
Address:
XXXXXXXXXX
Business Number:
Tax Services Office
XXXXXXXXXX
XXXXXXXXXX
Taxation Centre: 
XXXXXXXXXX
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all relevant Facts, Proposed Transactions and the Purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:
A. The amalgamation of Hodco1 and Holdco2 referred to in paragraph 43 will be an amalgamation described in subsection 87(1) and, upon the amalgamation, provided that the shares of Holdco1 are held by a particular holder thereof as Capital Property, the provisions of subsection 87(4), other than paragraphs 87(4)(c) to (e), will apply to such holder.
B. Child1 who is not resident in Canada and who will dispose of shares of the capital stock of Holdco1 as a consequence of the amalgamation referred to in paragraph 46 will not be required to comply with the requirements of section 116 in respect of the disposition and subsection 116(5) will not apply to impose any liability on any person as a result of the amalgamation.
C. Pursuant to subsection 110.1(1), the FMV of the gift(s) of the shares of Foreignco1 to one or more Charity by Amalco, described in paragraph 50 above, will be included in determining the total charitable gifts of Amalco for its taxation year during which the gift(s) is (are) made, provided an official receipt containing the prescribed information is issued by the Charity(ies) and filed by Amalco as required by subsection 110.1(2).
D. Provided that the shares of the capital stock of Foreignco1 owned by Amalco are Capital Property to Amalco, no portion of the capital gain(s) arising from the disposition by way of gift(s) to one or more Charity of the Foreignco1 shares, as described in paragraph 50 above, will be included in computing Amalco’s taxable capital gain(s) to the extent provided for in paragraph 38(a.1).
E. The full amount of the net capital gain arising from the disposition of the shares of Foreignco1 resulting from the making of the gift(s) to one or more charities as described in paragraph 50 above will be added to the CDA of Amalco pursuant to the application of the provisions of clauses (A) and (B) of the definition of CDA in subsection 89(1).
F. The provisions of subsection 85(1) will apply to:
a) the transfer by Parent of the XXXXXXXXXX class A common shares of the capital stock of Amalco owned by Parent to Amalco as described in paragraph 54 above; and
b) the transfer by Child4 of the XXXXXXXXXX class A common shares of the capital stock of Amalco owned by Child4 to Amalco as described in paragraph 58 above;
such that the agreed amount in respect of each transfer described herein will be deemed to be the transferor’s proceeds of disposition of the particular shares and the transferee’s cost thereof, and the transferor’s cost of the shares received as consideration for such disposition. For greater certainty, paragraph 85(1)(e.2) will not apply in respect of either of these transfers.
G. The provisions of subsection 85(2.1) will not apply to reduce the PUC of the XXXXXXXXXX class D common shares and XXXXXXXXXX class D common shares of the capital stock of Amalco issued by Amalco to Parent and Child4, respectively, (as described in paragraphs 54 and 58 above).
H. On the redemption of the XXXXXXXXXX class D preferred shares described in paragraph 62 above, Amalco will be deemed to have paid, and Parent will be deemed to have received, pursuant to subsection 84(3), a dividend equal to the amount by which the amount paid by Amalco on the redemption exceeds the PUC of the XXXXXXXXXX class D preferred shares immediately before the purchase.
I. On the redemption of the XXXXXXXXXX class D preferred shares described in paragraph 63, Amalco will be deemed to have paid, and Child4 will be deemed to have received, pursuant to subsection 84(3), a dividend equal to the amount by which the amount paid by Amalco on the redemption exceeds the PUC of the XXXXXXXXXX class D preferred shares immediately before the purchase.
J. Provided that Amalco elects pursuant to subsection 83(2), in respect of the full amount of each dividend that it is deemed to have paid as described in Rulings H and I, each of the dividends will be deemed to be a capital dividend to the extent of Amalco’s CDA, determined immediately before the time each dividend is deemed to be paid.
K. The provisions of subsections 15(1), 56(2), 69(4), 69(11) and 246(1) will not apply to any of the proposed transactions described herein, in and by themselves.
L. The provisions of subsection 245(2) will not be applied as a result of the proposed transactions, in and of themselves, to redetermine the tax consequences confirmed in the rulings given.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the CRA provided that the proposed transactions are completed by XXXXXXXXXX .
The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
COMMENTS
Nothing in this ruling should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of:
(a) the FMV or ACB of any property or the PUC of any shares referred to herein;
(b) the amount of the CDA and the amount available to Amalco as a deduction for gifts under paragraph 110.1(1)(a) referred to herein; 
(c) any other tax consequence relating to the facts, Proposed Transactions described herein other than those specifically described in the rulings given above or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that include other transactions or events that are not described in this letter; and,
An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover. 
Yours truly,
XXXXXXXXXX
for Director
Corporate Reorganizations and
Resources Industry Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

March 04, 2010

Canadian Budget 2010 announces disbursement quota reform for Canadian charities

The Canadian federal government announced disbursement quota reform in the 2010 Budget to remove the 80/20 expenditure requirement for registered Canadian charities.  For many charities this will have no real impact - they were handily satisfying their disbursement quota requirements and for those that were not (except in extreme cases) CRA was not using the DQ to revoke charitable status.  As one observer noted on the changes “No more 80/20 ordinary gift. No more enduring property, including 10 year gifts. No more specified gifts. No more intercharity transfer rules based on original DQ designation. Just a simple obligation to use the equivalent of 3.5% based on previous 24 month market average for charitable purposes. ... The 3.5% obligation doesn’t kick in for charitable organizations until there is $100k in assets, while for foundations it stays at $25k.”  We will probably have a revised T3010 at some point to reflect these changes and one can expect with the simpler formula that in the future CRA will more vigorously enforce the DQ provisions as this will be easier to understand.  There is no cost associated with this change and a number of other proposals to increase tax incentives from some organizations were not included in the budget, which makes sense in light of the difficult fiscal situation in addition to other reasons. 

This change will make it easier for donors and charities to more flexibly endow a charity or create a reserve for either a foundation or a charitable organization.  In the past in general if you donated a million dollars to a charity either you needed to have those funds subject to a ten year direction where the capital cannot be spent for ten year or your other choice was by the end of the following year you would need to spend 80% of the million dollars.  Now there is greater flexibility.  A donor can put in money to the charity or foundation, the charity will only have to spend 3.5% of the average value every year over the $100,000 mark (for charitable organizations) (or over 25,000 mark for foundations) but they can spend more.  So the donor and charity could decide to spend 33% in the first year, 33% in the second year and the rest in the third year.  On the downside this may result in an accumulation of resources, for example in foundations or charities when those funds would otherwise have been spent.  Practically many foundations being set up with endowments and receiving legal advice were using ten year gifts so the funds were being constrained for at least 10 years anyway.  There will now probably be greater scrutiny on foundations and certain charities - people will not be able to blame the DQ and ten year gifts for why they are not spending more money.

Charitable organizations will need to expend 3.5 per cent of all assets not currently used in charitable programs or administration, if these assets exceed $100,000.  This covers reserves, endowments, investment, buildings owned by a charity but not used in charitable programs or administration.  This will make it easier for small charities to accumulate a reserve or have some investments.
According to CRA “Property, for purposes of the 3.5% disbursement quota requirement for a registered charity, is property that:
*was owned by the registered charity at the beginning or end of the fiscal period covered by the return; and
*was not used directly in charitable activities or administration.”

For foundations the 3.5% requirement kicks in after 25,000, not 100,000 as for charitable organizaitons. 

Keep in mind that any previous ten year directions or trust restrictions still need to be complied with.  Charities need to carefully review their donation/endowment agreements to make sure that they reflect the current DQ regime.  Donors and charities must not slavishly follow pre-budget precedents that restrict their flexibility.

Some of the other impacts include:
* There will be less of a bias in favour of sponsorship over a donation as the increase in receipts issued will not affect the disbursement quota; 
* With respect to political activities Canadian charities are allowed to spend up 10% of resources on political activities but only so long as they have met their disbursement quota requirements.  As it will be easier to meet the disbursement quota requirement it will mean that more Canadian charities will be in a position to conduct allowable political activities in accordance with CRA rules set out in CPS-022;
* One of the other reasons given for the change in disbursement quota rules was the introduction of the Guidance on Fundraising by CRA in 2009.  Charities should be aware of the content of the CRA Fundraising Guidance as fundraising practices and costs will probably receive greater scrutiny; 
* There will probably have to be a more informed debate in Canada as to what is appropriate spending on non-charitable activities such as administration (overhead), fundraising, political, social and business; 
* Some charities that were exclusively doing microfinance activities had complained that the 80/20 requirement had made capital accumulation difficult as lending the funds was not an expenditure (only foregone interest etc) and this change should make it easier for a stand alone charity to do microfinance;
* Charities can focus on other governance, legal compliance and standards issues instead of being caught up in the nuances of the DQ.  For ideas as to what those issues are see:  http://www.capacitybuilders.ca/clip/clip.php
* With foreign activities when payments were made to an “agent” the funds were only considered spent when the agent spent them, not when they were transferred by the Canadian charity to the agent.  This distinction, which does not apply for example to contractor relationships, will be less important now that the dq is less important and much easier to meet.

Will the changes to the DQ mean that charities can stop allocating expenditures?  No.  Activities of a charity fall into different categories such as charitable, overhead (admin), fundraising, political, business and other such as social.  The CRA fundraising guidance discusses allocation of fundraising expenditures in great detail.  As long as there is a DQ (even if only 3.5%) charities will need to account for whether the expenditure fits into charitable or something else.  Irrespective of the DQ, many other stakeholders such as funders, boards, employees, the public, media etc require information and charities that do not provide that information can suffer as a result. 

One downside of the elimination of the 80/20 rule is that CRA has one less tool in their arsenal for getting rid of the few really bad charities.  However, the really bad charities are usually non-compliant with many provisions of the Income Tax Act or common law and this change should not hamper their efforts to remove such charities.  In the past when CRA went after a charity involved for example in a tax evasion scheme they went after the charity on a number of fronts, perhaps including the DQ.  That being said I hope that Finance adds some other tools to the ability of CRA to get rid of extremely bad charities and to inform the public of concerns that CRA has, for example with charities involved with massive tax evasion schemes.

Another downside in some cases will mean that operating charities may receive less from foundations as their dq requirement is less and some foundations seem to only spend the minimum they are required to spend by law.  We will have to see and I think there will be greater scrutiny on foundations as to how much they are disbursing.  Whereas in the past foundations that used 10 years gifts had justified their 3.5% disbursement by relying on the restrictions in a 10 year gift to not encroach on capital so now this particular support for such a practice will not exist. 

 

Here is a bit from Finances website:

“Helping Charities: Disbursement Quota Reform

The Government is proposing significant reforms to the disbursement quota to reduce administrative complexity and better enable charities to focus their time and resources on charitable activities.

The disbursement quota, introduced in 1976, was intended to ensure that a significant portion of a registered charity’s resources is devoted to its charitable purposes. Many observers have noted that the disbursement quota has been unable to achieve its intended purpose, as it does not take account of the varying circumstances of individual charities. Stakeholders such as Imagine Canada have also noted that the disbursement quota imposes “an unduly complex and costly administrative burden on charities—particularly small and rural charities.”

In recent years, the Canada Revenue Agency’s ability to ensure the appropriateness of a charity’s fundraising and other practices has been strengthened through the introduction of new legislative and administrative compliance measures and the provision of additional resources. These actions provide a more effective and direct means to fulfill many of the objectives of the disbursement quota.

Budget 2010 proposes to eliminate all disbursement quota requirements except those related to the requirement to annually disburse a minimum amount of investments and other assets not used directly in a charity’s operations. This requirement is being updated to provide charitable organizations a greater ability to maintain reserves to deal with contingencies.

The reformed disbursement quota rules will apply to charities for fiscal years ending on or after March 4, 2010. These changes will have no fiscal impact.”

HERE IS FURTHER INFORMATION:

http://www.budget.gc.ca/2010/plan/anx5-eng.html
ANNEX 5: TAX MEASURES: SUPPLEMENTARY INFORMATION AND NOTICES OF WAYS AND MEANS MOTIONS
Table of Contents - TABLE OF CONTENTS - TAX MEASURES: SUPPLEMENTARY INFORMATION - CHARITIES: DISBURSEMENT QUOTA REFORM

Background

It is estimated that Canadian individuals will receive $2.4 billion in federal tax relief on charitable donations of $8.8 billion in 2009. In addition, corporations benefit from a deduction with respect to charitable donations.

Charitable activities are not defined in the Income Tax Act; instead, the meaning of charitable purposes and charitable activities in Canada is largely determined by jurisprudence. Charities must devote their resources to charitable purposes. The Income Tax Act specifies requirements for registration as a charity as well as grounds for revocation of that status. The Canada Revenue Agency determines the eligibility of an organization to be a registered charity for federal income tax purposes, based on an examination of the organization’s purposes and activities. In addition, charities are subject to corporate and trust law.

The disbursement quota was introduced in 1976 to help curtail fundraising costs and limit capital accumulation. The disbursement quota is intended to ensure that a significant portion of a registered charity’s resources are devoted to charitable purposes.

In general terms, the disbursement quota requires that the amount a charity spends each year on charitable activities (including gifts to qualified donees) be at least the sum of:
• 80 per cent of the previous year’s tax-receipted donations plus other amounts relating to enduring property and transfers between charities (in other words, a “charitable expenditure rule”); and

• 3.5 per cent of all assets not currently used in charitable programs or administration, if these assets exceed $25,000 (in other words, a “capital accumulation rule”).

Some have observed that the impact of the charitable expenditure rule can vary considerably, for reasons unrelated to the manner in which a charity conducts its charitable activities. For example, some charities have a wide range of revenue sources from which to fund their charitable activities, such as grants received from governments and revenues from related business activities. Since all charitable expenditures count toward meeting the disbursement quota, these charities have little difficulty satisfying it even if they do not spend their tax-receipted donations on charitable activities. In contrast, the rule is much more constraining on many small and rural charities that rely mainly on tax-receipted donations.

Stakeholders such as Imagine Canada have called for the elimination of the disbursement quota because it imposes “an unduly complex and costly administrative burden on charities - particularly small and rural charities” and it constrains the flexibility of charities, without achieving its core purpose of limiting spending on fundraising and non-charitable activities.

Recent legislative and administrative initiatives have strengthened the Canada Revenue Agency’s ability to ensure that a charity’s fundraising and other practices are appropriate. For example, the Canada Revenue Agency publication “Fundraising by Registered Charities” provides guidance for charities on acceptable fundraising practices.

The Canada Revenue Agency may impose sanctions or revoke the registration of a charity in situations where charities use their funds inappropriately, such as in cases where there is undue private benefit. These tools provide a more effective and direct means to fulfill the objectives of the charitable expenditure rule of the disbursement quota.

Budget 2010 proposes to reform the disbursement quota for fiscal years that end on or after March 4, 2010. Specifically, Budget 2010 proposes to:
• repeal the charitable expenditure rule;
• modify the capital accumulation rule; and
• strengthen related anti-avoidance rules for charities.

The Government will monitor the effectiveness of the Canada Revenue Agency’s guidance on “Fundraising by Registered Charities”, and take action if needed to ensure its stated objectives are achieved.

Repeal of Charitable Expenditure Rule

Budget 2010 proposes to repeal the charitable expenditure rule. Consequently, provisions relating to a number of concepts will no longer be required to calculate the disbursement quota:
• enduring property (gifts to a charity for endowments or multi-year charitable projects which are not subject to the charitable expenditure rule);
• the capital gains reduction and the capital gains pool (provisions that ensure that capital gains realized from the disposition of enduring property are not subject to the charitable expenditure rule and the capital accumulation rule);
• specified gifts (a provision that allows charities with disbursement excesses to help charities with disbursement shortfalls to meet their disbursement quota requirements); and
• exclusions from the calculation of the base to which the 3.5-per-cent disbursement rate is applied (provisions that ensure that funds subject to the charitable expenditure rule are not also subject to the capital accumulation rule).

Budget 2010 also proposes to amend the existing rule that provides the Canada Revenue Agency with the discretion to allow charities to accumulate property for a particular purpose, such as a building project. The existing provision states that property accumulated after approval from the Canada Revenue Agency and any income earned in respect of that property is deemed to have been spent on charitable activities. This rule will require amendment in the absence of the charitable expenditure rule. In order to allow a charity to accumulate property for a particular project, the Canada Revenue Agency will be given the discretion to exclude the accumulated property from the capital accumulation rule calculation.

Modify the capital accumulation component

There is currently an exemption from the capital accumulation rule for charities having $25,000 or less in assets not used in charitable programs or administration. Budget 2010 proposes to increase this threshold to $100,000 for charitable organizations. This increase will reduce the compliance burden on small charitable organizations and provide them with greater ability to maintain reserves to deal with contingencies. The threshold for charitable foundations will remain at $25,000.
The amount of all assets not currently used in charitable programs or administration, for the purpose of the capital accumulation rule in the disbursement quota, is subject to a calculation provided for in the Income Tax Regulations. This calculation requires a technical amendment to clarify that it applies both to charitable foundations and charitable organizations.

Strengthen anti-avoidance rules
Budget 2010 proposes to extend existing anti-avoidance rules to situations where it can reasonably be considered that a purpose of a transaction was to delay unduly or avoid the application of the disbursement quota.
Budget 2010 proposes provisions to ensure that amounts transferred between non-arm’s length charities will be used to satisfy the disbursement quota of only one charity. It is proposed that a recipient charity, in such circumstances, be required to spend the full amount transferred on its own charitable activities, or to transfer the amount to a qualified donee with which it deals at arm’s length, in the current or subsequent taxation year. Alternatively, the transferring charity will be able to elect that the amount transferred will not count towards satisfying its disbursement quota, in which case the recipient charity would not be subject to the immediate disbursement requirement under the anti-avoidance rules.

PREVIOUSLY ANNOUNCED MEASURES
Budget 2010 confirms the Government’s intention to proceed with the following previously-announced tax measures, as modified to take into account consultations and deliberations since their release:
• The income tax technical and bijuralism amendments that were previously released but not yet implemented. 

 
NOTICE OF WAYS AND MEANS MOTION TO AMEND THE INCOME TAX ACT AND INCOME TAX REGULATIONS
That it is expedient to amend the Income Tax Act and Income Tax Regulations to provide among other things:

Charities: Disbursement Quota Reform
(18) That, for taxation years of registered charities that end on or after March 4, 2010,
(a) the definitions “capital gains pool”, “enduring property” and “specified gift” in subsection 149.1(1) of the Act be repealed;
(b) the formula in the definition “disbursement quota” in subsection 149.1(1) of the Act be replaced by the following:
A x B x 0.035 / 365
where
A is the number of days in the taxation year, and
B is
(a) the prescribed amount for the year, in respect of all or a portion of a property owned by the charity at any time in the 24 months immediately preceding the taxation year that was not used directly in charitable activities or administration, if that amount is greater than
(i) if the registered charity is a charitable organization, $100,000, and
(ii) in any other case, $25,000, and
(b) in any other case, nil;
(c) the following definition be added in alphabetical order in subsection 149.1(1) of the Act:
“designated gift” means that portion of a gift, made in a taxation year by a registered charity, that is designated as a designated gift in its information return for the year.
(19) That, for taxation years of registered charities that end on or after March 4, 2010, the word “specified” in subsection 149.1(1.1) of the Act be replaced with the word “designated”.
(20) That, for taxation years of registered charities that end on or after March 4, 2010, subsection 149.1(4.1) of the Act be amended
(a) by replacing paragraph 149.1(4.1)(a) with the following:
(a) of a registered charity, if it has entered into a transaction (including a gift to another registered charity) and it may reasonably be considered that a purpose of the transaction was to avoid or delay unduly the expenditure of amounts on charitable activities;
and
(b) by adding the following after paragraph 149.1(4.1)(c):
(d) of a registered charity, if it has in a taxation year received a gift (other than a designated gift) from another registered charity with which it does not deal at arm’s length, and if it has not expended, before the end of the next taxation year, in addition to its disbursement quotas for those taxation years, an amount at least equal to the total amount of the gift, on charitable activities carried on by it or by way of gifts made to qualified donees with which it deals at arm’s length.
(21) That, for taxation years of registered charities that end on or after March 4, 2010, subsection 149.1(8) of the Act be replaced by the following:
(8) A registered charity may, with the approval in writing of the Minister, accumulate property for a particular purpose, on terms and conditions, and over such period of time, as the Minister specifies in the approval, and any property accumulated after receipt of and in accordance with that approval, including any income earned in respect of the accumulated property, is not to be included in the amount described in B in the formula in the definition “disbursement quota” in subsection (1) for any taxation year that the Minister specifies.
(22) That, for taxation years of registered charities that end on or after March 4, 2010, subsection 188.1(11) be replaced by the following:
(11) If, in a taxation year, a registered charity has entered into a transaction (including a gift to another registered charity) and it may reasonably be considered that a purpose of the transaction was to avoid or delay unduly the expenditure of amounts on charitable activities, the registered charity is liable to a penalty under this Act for its taxation year equal to 110% of the amount of expenditure avoided or delayed, and in the case of a gift to another registered charity, both charities are jointly and severally, or solidarily, liable to the penalty.
(12) If a registered charity has in a taxation year received a gift of property (other than a designated gift) from another registered charity with which it does not deal at arm’s length, and if it has not expended, before the end of the next taxation year, in addition to its disbursement quotas for those taxation years, an amount at least equal the amount of the gift, on charitable activities carried on by it or by way of gifts made to qualified donees with which it deals at arm’s length, the registered charity is liable to a penalty under this Act for that subsequent taxation year equal to 110% of the amount of by which the fair market value of the property exceeds the total of such amounts expended.

The CCCC in a newsletter noted as follows:

CRA to Revise T3010B Form

In consultation with Charities Directorate officials today, CCCC has confirmed that a new T3010B will need to be released by CRA.  The Directorate is hopeful that only a portion of the form may need to be redrafted, rather than a whole new form being produced.  For now, charities should continue to use the existing T3010B.  CRA will continue to accept these forms until a new form, or portion of a new form, is available.

CRA to Provide Instructional Insert

A priority for the Directorate will be the production of an insert containing instructions on how to calculate the disbursement quota in light of the changes.  For example, the insert will direct charities to now ignore the concept of a specified gift, as specified gifts no longer exist.  The Charities Directorate has advised that a new question and answer release will be available later today on the “What’s New” section of the CRA website.

Compliance with CRA Guidance Still Required

CRA will continue to monitor and enforce appropriate and adequate spending by charities through several new administrative guidances which have recently been introduced or are anticipated, along with existing audit and enforcement measures.  For example,
• CPS-028, Fundraising by Registered Charities
• CPS-019, Related Businesses
• CPS-022, Political Activities
• RC4106, Registered Charities Operating Outside Canada (a new guidance is expected later this year)
Charities are reminded that the basic rule for spending on charitable activity has not changed.  In accordance with the Income Tax Act, charities are still required to spend all of their resources on charitable activity.  As long as charities adhere to CRA administrative guidance applicable to the activities of each specific charity, charities will remain in compliance.

 

Mark Blumberg is a lawyer at Blumberg Segal LLP in Toronto, Ontario.  To find out more about legal services that Blumbergs provides to Canadian charities and non-profits please visit http://www.canadiancharitylaw.ca or http://www.globalphilanthropy.ca  Mark can be contacted at .(JavaScript must be enabled to view this email address) or at 416-361-1982.

This article is for information purposes only. It is not intended to be legal advice. You should not act or abstain from acting based upon such information without first consulting a legal professional.

March 02, 2010

CRA comments on gift to charity under will that is poorly drafted

This letter from CRA is a reminder that when leaving funds to a registered charity under a will the drafting is important.

LANGIND E
DOCNUM 2007-0259841E5
AUTHOR Maley, Robin
DESCKEY 25
RATEKEY 2
REFDATE 091007
SUBJECT Gift by Will
SECTION 118.1(5)
SECTION
SECTION
SECTION
$$$$

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu’exact au moment émis, peut ne pas représenter la position actuelle de l’ARC.

PRINCIPAL ISSUES: Whether a gift by will may be claimed in a particular situation, where an individual died and the individual’s will instructed that the residue of the estate be held in trust, with net income to be paid to registered charities.
POSITION: General comments.
REASONS: Reference is made to IT-226R.  No amount will be allowed with respect to a gift by will, within the meaning of subsection 118.1(5), in circumstances where the value of the donation at the time it is made cannot reasonably be determined.

XXXXXXXXXX 2007-025984

October 7, 2009

Dear XXXXXXXXXX :

This is in reply to your letter dated November 7, 2007 in which you pose several questions concerning the application of the Income Tax Act (the “Act”) to a situation where an individual dies, and the individual’s will instructs the trustee to hold and keep invested the residue of the estate in a trust, and to pay the net income in equal shares to named beneficiaries, each of which is a registered charity.  Specifically, you ask whether a separate T3 return must be filed for the estate and for the trust that is established to benefit the charities.  If separate T3 returns are filed, you ask whether the trusts must have the same taxation year.  You also have asked what amounts may be deducted in computing the income of the trust(s).  Finally, you ask whether any amount may be claimed on the T1 return of the deceased in respect of the gift to the charities.

The particular situation outlined in your letter clearly relates to a factual one, involving a specific taxpayer.  As explained in Information Circular 70-6R5, it is not this Directorate’s practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling request. Where a situation involves a specific taxpayer and a completed transaction, the inquiry should be addressed to the relevant Tax Services Office, together with all relevant facts and documentation.  However, we are prepared to offer the following general comments, which may be of assistance.

A testamentary trust is defined in subsection 108(1) of the Act as a trust or estate which arose on and as a consequence of the death of an individual (subject to the specific exceptions set out in the definition). A trust created pursuant to the terms of an individual’s will is a testamentary trust if it otherwise satisfies the definition in subsection 108(1). It is a question of fact whether the terms of a particular will provide for the creation of a trust. 

Income earned by an estate after the date of death must be reported on a T3 Information Return.  If the terms of a trust were established by the will (or, by a court order in relation to the deceased individual’s estate under provincial or territorial dependant relief or support law), a T3 return would also be required for that trust.  For additional information, you may wish to refer to the CRA’s Guide T4011, “Preparing Returns for Deceased Persons”, which is available on the on the CRA website at http://www.cra-arc.gc.ca/E/pub/tg/t4011/t4011-e.html#P129_11581.

The first taxation year of a testamentary trust begins on the day after the person dies and ends within the next 12 months. There is no requirement that the same taxation year be adopted in circumstances where there is more than one testamentary trust arising as a consequence of a particular individual’s death.  For additional information, reference may be made to the CRA Guide T4013, “T3 Trust Guide”, which is available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tg/t4013/t4013-e.html#P184_17040. 

Pursuant to subsection 104(6), there may be deducted in computing the income of an estate or trust for a taxation year, such amount as the estate or trust claims that would be its income for the year as became payable in the year to a beneficiary. Subsection 104(24) provides that, for the purposes of subsection 104(6),  an amount is deemed not to have become payable to a beneficiary in the year for the purposes of subsection 104(6) unless the amount was actually paid to the beneficiary in the year, or the beneficiary was entitled in the year to enforce payment of it. 

As noted in Interpretation Bulletin IT-286R2, “Trusts - Amounts Payable”, the law provides the executor of an estate with a year (often referred to as the “executor’s year”) to administer an estate, during which time, the beneficiaries of the estate cannot demand the distribution of property held by the executor.  After this time, it is a question of fact as to whether the executor is able to distribute property and whether the income of the estate is payable to a beneficiary. 

IT-286R2 states that, where the initial taxation year of a testamentary trust coincides with the executor’s year and where the sole reason for the rights of a beneficiary being unenforceable is the existence of an executor’s year, the income of the trust for that year will be considered to be payable to the beneficiary or beneficiaries of the trust pursuant to subsection 104(24) provided that none of the beneficiaries object to this treatment.  If there is no designation under subsection 104(13.1), such amounts would be included in the beneficiaries’ incomes for the year pursuant to subsection 104(13).  The estate would pay tax on income that was not payable to a beneficiary. The full text of IT-286R2 is available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tp/it286r2/it286r2-e.html.

Pursuant to subsection 118.1(5), a gift made by an individual’s will is deemed to have been made, for purposes of subsection 118.1(1), immediately before the individual’s death, and as such, is claimed in the final T1 return of the deceased taxpayer.  For information on gifts made by an individual’s will, we would refer you to the comments in IT-226R, “Gift to a Charity of a Residual Interest in Real Property or an Equitable Interest in a Trust”, which is available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tp/it226r/it226r-e.html. 

As we have discussed with you, the specific will that you have referred to us for comments appears to be silent as to who would be the capital beneficiary of the trust. This raises a number of questions; however, since it is not clear who would receive the capital and at what time, we do not see how any amount could be allowed as a gift by the individual’s will pursuant to subsection 118.1(5).  As noted in paragraph 6 of IT-226R, in cases where the size of a residual or equitable interest at the time of its donation cannot reasonably be determined, no deduction or tax credit in respect of the donation will be allowed.

As stated in paragraph 22 of Information Circular 70-6R5, this opinion is not a ruling and consequently, is not binding on the CRA in respect of any particular situation.

Yours truly,

Robin Maley
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

——-

Mark Blumberg is a lawyer at Blumberg Segal LLP in Toronto, Ontario.  To find out more about legal services that Blumbergs provides to Canadian charities and non-profits please visit http://www.canadiancharitylaw.ca or http://www.globalphilanthropy.ca  Mark can be contacted at .(JavaScript must be enabled to view this email address) or at 416-361-1982.

This article is for information purposes only. It is not intended to be legal advice. You should not act or abstain from acting based upon such information without first consulting a legal professional.

 

February 12, 2010

Low Cost Fundraising - Legal Issues with Third Party Events and Bequests -with lawyer Mark Blumberg

Here is a free archived webinar entitled “Low Cost Fundraising - Legal Issues with Third Party Events and Bequests”. https://ocsa.webex.com/ocsa/lsr.php?AT=pb&SP=TC&rID=547307&rKey=d508eba7a71f3dbc&act=pb