CRA recently released a letter that discusses whether a transfer of property by a corporation to its shareholder that is a private foundation is a gift for purposes of section 38(a.1) of the Income Tax Act (Canada) such that the taxable capital gain from the transfer would be zero.

CRA had the following comments:

Paragraph 38(a.1) provides that a taxpayer’s taxable capital gain from the making of a gift of certain securities, including shares listed on a designated stock exchange, to a qualified donee is nil. Under common law, a gift is a voluntary transfer of property without valuable consideration. Generally, for purposes of sections 110.1 and 118.1, a gift under common law is made if a taxpayer has donative intent and all three of the following conditions are satisfied:

*          there must be a voluntary transfer of property to a qualified donee;

*          the property transferred must be owned by the donor; and

*          no benefit or consideration must flow to the donor. (footnote 1)

In general, where a taxpayer has disposed of anything by way of gift to any person, paragraph 69(1)(b) will apply to deem the taxpayer to have received proceeds of disposition equal to the fair market value (“FMV”) of the disposed property. Similarly, subsection 69(4) generally provides for deemed proceeds of disposition at FMV where property of a corporation has been appropriated to or for the benefit of a shareholder under certain circumstances. Where the property disposed of was capital property, a capital gain could result if the deemed FMV proceeds under subsection 69(1) or (4) exceed the adjusted cost base of the property.

As noted above, paragraph 38(a.1) will apply to deem a taxpayer’s taxable capital gain from a disposition of certain securities to be nil when the disposition is the making of a gift to a qualified donee. Whether a transfer of property constitutes a gift is a factual determination having regard to the legal meaning of a gift. Accordingly, in the scenario described, the specific facts and circumstances of the transfer would need to be reviewed to determine whether the transfer meets the requisites of a gift under common law.

1 Note that the meaning of gift under common law is modified under subsection 248(30), which allows for the recognition of a gift for tax purposes by a taxpayer in certain circumstances even though some form of benefit or consideration flows back to the taxpayer.