Principal Issues: (1) How the CRA intends to apply subparagraph 248(35)(b)(i), subsection 248(36) and paragraph 248(37)(g) where the property that is the subject of a gift made by a taxpayer to a qualified donee was acquired by reason of the death of the taxpayer's spouse or common law partner? Would the exclusion provided in paragraph 248(37)(g) apply to property acquired under subsection 70(6) if that property is donated to a qualified donee less than three years after the acquisition by the deceased? (2) On the other hand, if the property is transferred at fair market value to the deceased's spouse or common-law partner under subsection 70(5), would the donor qualify for the charitable donation credit on the increase in value between the acquisition date of the property by the surviving spouse or common-law partner and the date of the gift when the donation is made within three years after the spouse or common-law partner's death? Would the date of acquisition of the property by the deceased be taken into consideration?
Position: (1) In the given situation, since the property that is the subject of the gift by the taxpayer was acquired by reason of the death of an individual, we are of the view that subsection 248(36) is not applicable. As the conditions provided in paragraph 248(37)(g) are met, subsection 248 (35) does not apply. (2) Donations of property acquired in circumstances referred to in subsection 70(5) are not included in the list provided in paragraph 248(37)(g). Therefore, subsection 248(35) may apply if all conditions provided therein are met. If the property that is the subject of the gift by the taxpayer was acquired during the three-year period ending at the time of the donation by a person with whom the taxpayer does not deal at arm's length, but that the property was acquired by the taxpayer by reason of the death of an individual, subsection 248(36) would not apply.
Reasons: Based on our interpretation of subparagraph 248(35)(b)(i), subsection 248(36) and paragraph 248(37)(g).
FINANCIAL STRATEGIES AND INSTRUMENTS ROUNDTABLE, OCTOBER 10, 2014
2014 APFF CONFERENCE
Question 10
Application of subsections 248(35), (36) and (37)
Subsection 248(35) provides certain circumstances under which the FMV of a donated property to a qualified donee is deemed to be the lesser of its tax cost and its FMV.
a) the taxpayer acquired the property under a gifting arrangement that is a tax shelter as defined in subsection 237.1(1);
b) except where the gift is made as a consequence of the taxpayer’s death,
(i) the taxpayer acquired the property less than three years before the day that the gift is made, or
(ii) the taxpayer acquired the property less than 10 years before the day that the gift is made and it is reasonable to conclude that, at the time the taxpayer acquired the property, one of the main reasons for the acquisition was to make a gift of the property to a qualified donee (footnote 1). "
Subsection 248(36) provides the following respecting non-arm's length transactions:
If a taxpayer acquired a property, otherwise than by reason of the death of an individual, that is the subject of a gift to which subsection (35) applies because of subparagraph (35)(b)(i) or (ii) and the property was, at any time within the 3-year or 10-year period, respectively, that ends when the gift was made, acquired by a person or partnership with whom the taxpayer does not deal at arm’s length, for the purpose of applying subsection (35) to the taxpayer, the cost, or in the case of capital property, the adjusted cost base, of the property to the taxpayer immediately before the gift is made is deemed to be equal to the lowest amount that is the cost, or in the case of capital property, the adjusted cost base, to the taxpayer or any of those persons or partnerships immediately before the property was disposed of by that person or partnership. [Our emphasis]
Paragraph 248(37)(g) provides for an exception from the application of subsection 248(35) for gifts acquired on a rollover basis from a related person by reason of death or by inter vivos transfer where subsection 248(36) does not apply. There is a circular relationship between paragraph 248(37)(g) and subsection 248(36) which ensures that acquisitions occurring on a rollover basis by reason of death are automatically excluded from the application of subsection 248(35).
Consequently, the appreciation of the gifted property between the acquisition and the gift (within three years) is only eligible for gift credits where the transfer was made on a rollover basis, regardless of the date of acquisition by the deceased. It seems contrary to logic to favour only the taxpayer who has already benefited from a tax advantage. To this end, it should be noted that the Quebec equivalent of subsection 248(36) - section 7.26 of the Taxation Act - does not exclude from its application acquisitions resulting from death.
Questions to the CRA
a) You wish to know how the CRA intends to apply subparagraph 248(35)(b)(i), subsection 248(36) and paragraph 248(37)(g) in circumstances where the acquisition of property that is the subject of a gift to a qualified donee arises by reason of the death of the donor's spouse or common-law partner. Would the exclusion with respect to the application of subsection 248(35) provided for under paragraph 248(37)(g) apply to property acquired under the provisions of subsection 70(6) if the property was donated less than three years after the acquisition by the deceased?
b) Conversely, does using subsection 70(5) so that the property is transferred to the spouse at its FMV prevent the donor from being entitled to the gift credit for the capital gain realized on the property between the acquisition on death and the gift made within three years of the death? Would the date of acquisition of the property by the deceased be taken into consideration?
CRA response to question 10(a)
Paragraph 248(37)(g) states that subsection 248(35) does not apply to gifts of property acquired in circumstances described in subsection 70(6), except where subsection 248(36) would have applied without reference to paragraph 248(37)(g).
Under subsection 248(36), the cost to a taxpayer of property that is the subject of a gift to which subsection 248(35) applies or, in the case of capital property, its adjusted cost base ("ACB"), is deemed, for the purposes of subsection 248(35), to be the lesser of the cost or the ACB of the property, as the case may be, to the taxpayer or the person from whom the property was acquired, if the latter is a person with whom the taxpayer does not deal at arm's length and the property was acquired by that person during the three-year period ending at the time of the gift. The provisions of subsection 248(36) do not apply to gifts of property acquired by reason of the death of an individual.
Since, in the situation before us, the property that is the subject of the gift by the taxpayer was acquired by reason of the death of an individual, we are of the view that the provisions of subsection 248(36) are not applicable. As the conditions in paragraph 248(37)(g) are satisfied, subsection 248(35) will not apply.
CRA response to question 10(b)
Gifts of property acquired in the circumstances contemplated in subsection 70(5) are not included in the list provided in paragraph 248(37)(g). Consequently, subsection 248(35) may apply if all conditions provided therein are satisfied.
If the property that is the subject of the gift by the taxpayer was acquired during the three-year period ending at the time of the gift from a person with whom the taxpayer did not deal at arm's length, but the property was acquired by the taxpayer by reason of the death of an individual, as in the situation described, subsection 248(36) would not apply.
Marie-Claude Routhier
(613) 957-9768
2014-053864
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 ITA subsection 248(35).