Principal Issues: [TaxInterpretations translation] Can securities described in paragraph 38(a.1) be property acquired under a tax-sheltering gifting arrangement when they are the subject of a charitable gift?
Position: No response.
Reasons: Question of fact.
Financial Strategies and Financial Instruments Roundtable
2006 APFF CONFERENCE
Question 4
Elimination of capital gain on gift of securities and definition of tax shelter
As a result of the May 2, 2006 budget, the I.T.A. was amended to eliminate the capital gain on the donation of certain securities listed on a prescribed stock exchange and on mutual fund trust units.
Holders of public corporation shares having a significant unrealized capital gain may consider donating those shares to public foundations and taking advantage of the charitable donation credit computed on the fair market value of the donated securities. It is possible that the value of that credit could be greater than the cost of the security to the holder. In fact, the holder would currently have an incentive to donate securities having a low cost and high value in order to maximize the tax benefits of the donation.
The current tax shelter rules in section 237.1 apply to tax shelters, which are defined to include certain types of gifting arrangements, under which it is reasonable to consider, based on representations made, that property purchased under such arrangements would be donated to, inter alia, a registered charity and that such donation would give rise to tax credits (or deductions) in excess of the net cost of the property to the donor.
Question:
Can the CRA confirm that the acquisition of securities that qualify for the capital gains rule referred to above if donated to charity will not qualify as a tax shelter?
CRA Response
We cannot confirm that the acquisition of securities by a donor would not be property acquired under a gifting arrangement that would constitute a tax shelter as this issue must be determined in light of all relevant facts.
Under the July 18, 2005 Legislative Proposals Relating to Income Tax issued by the Department of Finance, where a property has been acquired by the donor under a gifting arrangement that is a tax shelter within the meaning of subsection 237.1(1), the fair market value of that property will be deemed by proposed subsection 248(35) to be the lesser of its actual fair market value and its cost or, in the case of capital property, its adjusted cost base, to the donor immediately before the gift, for the purpose of determining, inter alia, the eligible amount of a gift. However, proposed subsection 248(37) provides that proposed subsection 248(35) will not apply where the property that was the subject of the gift is described in paragraph 38(a.1), without taking into account the private foundation exception, or a gift to a qualified donee of a share, debt obligation or right listed on a prescribed stock exchange, a share of the capital stock of a mutual fund corporation, a unit of a mutual fund trust, an interest in a trust created in respect of a segregated fund within the meaning of paragraph 138.1(1)(a), or a prescribed debt obligation.
As discussed in Pamphlet P113, Gifts and Income Tax, the fair market value of a particular security, which is subject to paragraph 38(a.1), will be considered in determining the eligible amount of the gift.
Guy Goulet
(613) 957-9768
October 6, 2006
2006-019705