Principal Issues: [TaxInterpretations translation]
Under the three scenarios described in the facts, who would be able to claim the donation tax credit for the gift, made under Mr. X's will, of the shares of Realty Co to a registered charity or a private foundation? What value would be included on the charitable donation receipt?
Position:
General comments.
Reasons:
Interpretation of the Act.
XXXXXXXXXX Danielle Bouffard 2005-014212 March 21, 2007
Dear Sir,
Subject: Request for technical interpretation:
Subsections 118.1(5) and (6) of the Income Tax Act (the "Act")
This is in response to your fax of July 29, 2005, requesting our opinion on the above subject. We apologize for the delay in responding to this request.
Facts
Mr. X and Mrs. X are married under the community of property regime. Mr. X is the sole shareholder of Realty Co, which owns rental properties. Mr. X has taken advantage of the provisions of subsection 85(1) to transfer capital properties to Realty Co. In the context of estate planning, three scenarios are considered for the bequest of the shares of Realty Co.
Scenario 1
If Mr. X survived Mrs. X, all of the shares in Realty Co would be left in Mr. X's will to a registered charity or private foundation.
Scenario 2
If Mrs. X survived Mr. X and accepted the community (and refused the will), 50% of the shares in Realty Co would be her property. The remaining 50% of the shares in Realty Co, still registered in Mr. X's name, would be left by Mr. X to a registered charity or private foundation.
Scenario 3
If Mrs. X survived Mr. X and renounced the community, Mr. X's will would provide that all of the shares of Realty Co would be transferred to a testamentary spousal trust pursuant to paragraph 70(6)(b). In addition, the will would provide that upon Mrs. X's death, all shares held by the trust would be bequeathed to a registered charity or private foundation.
In all three scenarios, Mr. X's legal representative would utilize the provisions of subsection 118.1(6) and opt for the adjusted cost base ("ACB") of the Realty Co shares as the value of the gift.
Questions
In the three scenarios described above, you asked who would be able to claim the donation tax credit for the gift, under Mr. X's will, of the shares of Realty Co to a registered charity or private foundation. What value would be included on the charitable donation receipt?
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (the "CRA") not to issue written opinions on proposed transactions otherwise than through advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
Scenarios 1 and 2 -Donation on death by Mr. X of his Realty Co shares to a registered charity or private foundation.
For the provisions of section 118.1 to apply, the gift of property must be completed. For example, if a clause in an individual's will specifies that a gift of specified property is to be made to a registered charity upon the individual's death, no gift is actually completed until the individual's estate respects the deceased individual's intention and transfers ownership of the specified property to that charity. Thus, while subsection 118.1(5) may apply to deem the gift of that property to have been made immediately before the individual's death, the provisions of that subsection cannot take effect until the gift is actually completed.
Even if the transfer of ownership of a specified property is made by the individual's legal representative in a taxation year subsequent to the year of the individual's death and after the filing of the tax return for the year of death, the individual may be entitled, subject to subsection 118.1(13), to a deduction in computing the individual's tax payable pursuant to subsection 118.1(3) for the taxation year of death. Subject to the periods provided in the Act for reassessment, the estate could therefore apply to the appropriate Tax Centre for an adjustment to the deceased's final return pursuant to paragraph 152(6)(c) and attach the official receipt from the registered charity.
Generally, an individual who dies is deemed to have disposed of a capital property immediately before the death and to have received consideration equal to the fair market value ("FMV") of the property at the time of disposition pursuant to paragraph 70(5)(a). If the FMV of that capital property is greater than its ACB, the deemed disposition results in a capital gain to the taxpayer. Where a deceased individual has bequeathed capital property to, inter alia, a registered charity, subsection 118.1(6) provides for an election to reduce the capital gain that would otherwise result from the application of the rules in paragraph 70(5)(a) and to designate a value to the gift. The amount so designated cannot exceed the FMV of the property at the time it was donated and cannot be less than the ACB of that property. The designated amount is deemed to be the proceeds of disposition of the property, as well as the FMV of the gift used in determining the amount of the tax credit pursuant to subsection 118.1(3).
Where an individual makes a gift by will of a non-qualifying security that would be deemed by subsection 118.1(5) to have been made immediately before the individual's death and the gift is not an excluded gift within the meaning of subsection 118.1(19), the gift is deemed not to have been made except for the purpose of calculating the proceeds of disposition of the security for the purposes of subsection 118.1(6). A "non-qualifying security" is defined in subsection 118.1(18) to include a share (other than a share listed on a prescribed stock exchange) of the capital stock of a corporation with which the individual or the estate does not deal at arm's length immediately after a particular time. As stated in Technical Interpretation 9901115, in our view, the time to which subsection 118.1(18) refers is the time when the gift is completed (i.e., when ownership of the shares is transferred to the registered charity). Consequently, if immediately after the time of transfer of ownership of the shares of a corporation to the charity, the estate no longer controls and does not deal at arm's length with the corporation, the shares would not be non-qualifying securities to the deceased individual. Pursuant to the provisions of subsection 118.1(5), the deceased individual may therefore be entitled to a deduction in computing the individual’s tax payable under subsection 118.1(3) for the taxation year of death.
Scenario 3-Transfer by Mr. X of the shares of Realty Co to a testamentary spousal trust followed by a gift, upon the death of the spouse, to a charitable organization or private foundation.
Where paragraph 70(6)(b) applies, a spousal trust that acquires a capital property as a consequence of a taxpayer's death usually does so at the cost of the property to the taxpayer for tax purposes. This amount is also the deceased's proceeds of disposition of the property. For paragraph 70(6)(b) to apply, the capital property transferred or distributed (e.g., in Scenario 3, the shares of Realty Co) to a spousal trust must have vested indefeasibly in the trust within 36 months of the taxpayer's death. However, paragraph 70(6)(b) would not apply if a valid election is made pursuant to subsection 118.1(6). Indeed, as stated in paragraph 8 of IT-226R, if the FMV of a property immediately before death exceeds the ACB of the property, the taxpayer's legal representative may make the election provided for under subsection 118.1(6). By virtue of subsection 248(8), property is considered to have been transferred or distributed to, and acquired by, a spousal trust as a consequence of a taxpayer's death if the transfer, distribution or acquisition was made under, or as a consequence of, the taxpayer's will or other testamentary instrument.
As stated in paragraph 3 of Interpretation Bulletin IT-226R, where a capital interest in a testamentary trust is created for the benefit of a charity, the capital interest may qualify as a gift for the purposes of subsection 118.1(3). If we assume in Scenario 3 that neither Ms. X nor any other person can access the capital of the trust, a testamentary gift of a capital interest in the trust could have been made by the deceased.
As noted in paragraph 4 of IT-226R, In the case of an equitable interest in a trust, the CRA considers a gift to have been made when the transfer of property (in Scenario 3, the shares of Realty Co) to the trust has been completed and the equitable interest in the trust has vested in the charity (see also the comments in paragraph 2 of IT-226R). Thus, while subsection 118.1(5) may apply to deem Mr. X to have made a gift of property (in this case, the property that is the subject of the capital interest) immediately before his death subject to subsection 118.1(13), the provisions of subsection 118.1(5) cannot take effect until the gift is actually completed. A return is filed by the taxpayer's representatives pursuant to paragraph 152(6)(c) to give effect to the deemed disposition immediately before death. However, a gift is deemed not to have been made under subsection 118.1(13) in the case of a non-qualifying security (as defined in subsection 118.1(18)), other than an excepted gift (as defined in subsection 118.1(19)). We also refer you to the comments in paragraphs 5 and 6 of IT-226R, which describe, inter alia, certain problems relating to the valuation of the trust's equitable interest.
The comments herein do not take into account, inter alia, new subsections 118.1(5.4), and 248(30) to 248(41) contained in Bill C-33 An Act to amend the Income Tax Act, including amendments in relation to foreign investment entities and non-resident trusts, and to provide for the bijural expression of certain provisions of that Act, and to provide for related legislation that received first reading on November 22, 2006.
These comments are not advance income tax rulings and do not bind the CRA with respect to any particular factual situation.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch