Amended s. 118.1(5.1) require that a donation be a gift of "property that was acquired by the estate on and as a consequence of the death" or "property that was substituted for that property." The individual, at death after 2015, held "Holdco" owning appreciated marketable securities. The estate is directed by will to make a donation.
Scenario 1
Holdco sells the securities and pays a dividend to the graduated rate estate, which makes the donation. Would the cash from the dividend be considered substituted property?
CRA responded that the estate has not replaced the Holdco shares received on death, so that the cash dividend is not property substituted for the Holdco shares. As the requirement in s. 118.1(5.1)(b) is not met, only the estate could claim a donation in the year or in the five subsequent taxation years.
Scenario 2
Estate transfers the shares of Holdco under s. 85(1) to Newco and takes back high PUC shares of Newco. Holdco is wound up and Newco receives the marketable securities (whose adjusted cost base has been "bumped" under s. 88(1)(d).) Newco uses the proceeds of sale of the securities to purchase for cancellation some of the estate's shares. Estate uses such cash to make the charitable donation. Is the donation is made with substituted property?
CRA responded that, as the shares of Holdco (which were received on death) are disposed of in exchange for the Newco shares, the Newco shares are substituted property. Furthermore, the cash received on the purchase for cancellation would be substituted property for the cancelled Newco shares and, under the extended meaning of "substituted property" in s. 248(5)(a), that cash also would be substituted property for the Holdco shares. Accordingly, s. 118.1(5.1)(b) would be satisfied.