Principal Issues: Is the "FMV of any consideration received by the donee for the disposition" in subsection 118.1(13) limited to the notion of "proceeds of disposition" in section 54?
Position: No.
Reasons: The notion of "consideration" is broader.
FEDERAL TAX ROUNDTABLE, OCTOBER 7, 2021
APFF CONFERENCE 2021
Question 14
Definition of "consideration … received by the donee for the disposition” of non-qualifying securities in the context of a redemption of shares of a private corporation for the purposes of subsection 118.1(13)
The donation of non-qualifying securities ("NQS") to a qualified donee is subject to specific restrictions under subsection 110.1(6) in the case of a corporation and subsection 118.1(13) in the case of an individual. Those restrictions ensure, inter alia, that the gift is only recognized to the extent that the NQS is itself disposed of by the qualified donee within 60 months of the time of the gift.
Essentially, subsection 118.1(18) provides that debt obligations and shares of a private corporation are NQSs for the purposes of the charitable deduction or tax credit. In such case, subsection 118.1(13) provides that the gift is deemed not to have been made until the qualified donee disposes of the NQS, provided that the disposition is made within 60 months of the initial donation of the NQS to the qualified donee.
In this case, the gift is deemed to have been made by the taxpayer at the time of the disposition of the NQS by the qualified donee and the eligible amount of the gift is deemed to be the lesser of the FMV of any consideration received by the qualified donee for the disposition of the NQR and the FMV of the property at the time of its donation to the qualified donee. No charitable donation receipt may be issued by the qualified donee in that regard until the qualified donee in turn disposes of the NQS.
In this regard, the Income Tax Act does not specify whether the "fair market value of any consideration … received by the donee for the disposition” of the NQS refers to the specific concept of "proceeds of disposition" provided for in section 54 or, more generally, to any consideration received in connection with such disposition, including the portion of such consideration that would constitute a deemed dividend under subsection 84(3) in the event of a redemption of shares.
Question to the CRA
Can the CRA confirm that the "fair market value of any consideration … received by the donee for the disposition” of the NQS is not limited to the specific concept of "proceeds of disposition" under section 54?
CRA Response
Paragraph 118.1(13)(a) provides that, where an individual makes a gift of a NQS [non-qualifying security] at a particular time and the gift is not an excepted gift, the gift is deemed not to have been made for the purposes of section 118.1 (other than for the purposes of subsection 118.1(6) in computing the individual's proceeds of disposition of the NQS). The gift will be eligible for later recognition under paragraph 118.1(13)(b) if the NQS ceases to be a NQS within 60 months after the particular time or, under paragraph 118.1(13)(c), if the qualified donee disposes of the NQS within that time. If the qualified donee does not dispose of the NQS within 60 months and the NQS does not cease to be a NQS within that period, the gift will simply not be recognized for purposes of the Income Tax Act.
If paragraph 118.1(13)(c) applies, then the FMV of the gifted property will be deemed to be equal to the lesser of the FMV of any consideration (other than a NQS of any person) received by the qualified donee for the disposition and the FMV of the NQS at the particular time.
Subsection 118.1(18) defines what constitutes a NQS for the purposes of section 118.1. That definition includes a share (other than a share listed on a designated stock exchange) of the capital stock of a corporation with which the individual does not deal at arm's length.
The word "consideration" is not defined in the Income Tax Act. The jurisprudence indicates that "consideration" is a broad term, which can be either a right, interest, profit or benefit to one party, or a waiver, disadvantage, loss or liability to the other party. Thus, generally speaking, and in the absence of any indication to the contrary from the context, the notion of "consideration" is broad enough to encompass any amount, good or service received upon the disposition of property.
The CRA is of the view that the word "consideration" in the phrase "fair market value of any consideration … received by the donee for the disposition … of the security" in paragraph 118.1(13)(c) must be given the broad meaning generally accepted in the jurisprudence. Thus, for the purposes of paragraph 118.1(13)(c), the expression "consideration received for the disposition" is not limited to "proceeds of disposition" as defined in section 54.
Consequently, the CRA is of the view that for the purposes of paragraph 118.1(13)(c), the consideration received by the qualified donee for the disposition of a NQS may include the portion of that consideration that is a deemed dividend received by the qualified donee by virtue of subsection 84(3) on a redemption of shares.
That being said, the FMV of the donated property as determined by virtue of paragraph 118.1(13)(c) does not necessarily represent the eligible amount of the gift for the purposes of the definition of "total charitable gifts" in subsection 118.1(1). In determining the eligible amount of the gift, the rules in subsections 248(30) to 248(41) must also be taken into account. The eligible amount of the gift in a particular situation can only be determined in light of all the facts and circumstances of the particular situation.
Finally, it should be noted that, depending on the facts and circumstances of a particular situation, subsection 129(1.2) could apply in a situation where shares of a private corporation were redeemed by the corporation after they had been donated. Subsection 129(1.2) is a specific anti-avoidance rule whereat, for the purposes of subsection 129(1), a dividend paid on a share of the capital stock of a corporation is deemed not to be a taxable dividend if the shareholder acquired the share or a share substituted for it in a transaction, or as part of a series of transactions, one of the main purposes of which was to enable the corporation to obtain a dividend refund ("DR"). The corporation is not entitled to its DR where subsection 129(1.2) applies (footnote 1).
Isabelle Brulotte
October 7, 2021
2021-090104
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 See in this regard the response to Question 3 of the 2020 APFF Conference Financial Strategies and Financial Instruments Roundtable, CANADA REVENUE AGENCY, Technical Interpretation 2020-0851991C6, October 7, 2020.