CRA considers that an estate gift funded by share redemption proceeds – but not by a dividend – generally will satisfy s. 118.1(5.1)(b)

S. 118.1(5.1)(b) provides the new rules for charitable donations from a (post-2015) graduated rate estate and in most circumstances requires that the donation must be a gift of (i) property that was acquired by the estate on and as a consequence of the death or (ii) property that is substituted for that property. Per CRA, the gift is meant to be paid out of the property owned at death or property substituted for such owned property. CRA will not consider this requirement to be satisfied if the estate uses a dividend received on shares, that were held on death, to make a gift directed by the will: the estate continues to hold the shares so that the dividend is not property substituted for the shares.

On the other hand, if the cash is received for the shares’ redemption, the cash will now qualify as substituted property, so that s. 118.1(5.1)(b) will be satisfied.

S. 248(5)(a) indicates that if there are two substitutions, the ultimate property is substituted property for the original property. Accordingly, if the estate exchanges its shares for shares of a Newco, and Newco then redeems its shares, the cash redemption proceeds will be good substituted property to the estate.

Neal Armstrong. Summary of 19 September 2015 STEP Roundtable, Q. 11 under s. 118.1(5.1)(b).