Revenue Canada Taxation Head Office
R.B. Day 957-2136
Mr. Michel Weiss Accounting Services Branch Supply & Services Canada 12B1, Phase III Place du Portage Hull, Quebec K1A 0S5
APR 29 1988
Dear Mr. Weiss:
Re: XXXX Proposed Gift of an Interest in Farm Land
We are writing in reply to your letter of March 9, 1988, wherein you requested our views regarding the income tax implications with respect to the above-noted subject.
XXXX
There are three provisions in the Income Tax Act (the "Act") which may be relevant in the circumstances. Paragraph 110(1)(b) of the Act provides that a taxpayer who makes a gift to "Her Majesty in right of Canada" may deduct the value of such gift in computing taxable income without restriction. This paragraph, as presently enacted, also provides for a five year carry-forward of any portion of the gift not deducted in the year in which it is made.
Subparagraph 69(1)(b) of the Act provides that a taxpayer who transfers property by way of gift is deemed to have received the fair market value of the property as proceeds of disposition.
Subsection 110(2.2) of the Act provides that where a gift of capital property, having a fair market value greater than its cost to the donor, has been made to a donee described in paragraph 110(1)(a) or (b) of the Act, the donor may designate as proceeds of disposition (in spite of the provisions of paragraph 69(1)(b) of the Act) an amount equal to the cost of the property to him, its fair market value at the date the gift is made, or any amount between those two values.
In order for a taxpayer to elect under subsection 110(2.2) of the Act, a gift must, in fact, have been made. There must be both an offer and an acceptance for this to occur.
Assuming that the taxpayer is entitled to elect under subsection 110(2.2) of the Act in respect of the gift, and should an amount be selected as proceeds of disposition in excess of the cost of the property, a taxable capital gain would be realized on the disposition. The taxpayer may, however, be able to claim the capital gains deduction under section 110.6 of the Act, depending upon the particular circumstances.
There is an obligation on both the taxpayer and the Crown to determine the fair market value of the property being gifted. An accurate valuation is required for purposes of issuing a receipt for the gift, and also for determining whether the taxpayer will qualify for the election under subsection 110(2.2) of the Act.
The income tax consequences of the proposed gift, as discussed above, is based on existing income tax legislation and does not take into account the proposed amendments under the Tax Reform Measures set out in the Notice of Ways and Means Motion, tabled by the Minister of Finance on December 16, 1987.
Should these measures be enacted into law, it would appear that the proposed gift as envisioned by paragraph 110(1)(b) of the Act would, for the 1988 and subsequent taxation years, give rise to a tax credit rather than a deduction in computing taxable income. We are enclosing, for your information, a copy of page 10 of the "Supplementary Information Relating to Tax Reform Measures" which discusses this issue further.
With respect to the three specific questions posed in XXXX letter, we offer the following comments.
1. Before the proposed gift of the 25% interest in farm land is consummated, a valuation of the property should be undertaken to establish the fair market value of her interest in the land as of the date of gift.
2. Should the Tax Reform proposals become law, it would appear that XXXX would be entitled to tax credits with respect to the gift in the relevant year or years.
3. Although the taxable capital gain, if any, arising from the gift must be reported by XXXX she and her husband may allocate the amount of the donation between them in a manner that is most advantageous to them.
Should you require further information or explanations in this regard, please contact the writer.
Yours truly,
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch
Enclosure