CRA comments on the return of by a charity to the donor of a gift made 35 years ago

An individual gifted a whole life insurance policy to a charitable university foundation on condition that the funds be used in a specific program, which has now been discontinued, so that the donor now wants his gift back. CRA noted that generally gifted property becomes the absolute property of the donee, so that now returning a gift to the donor could result in the foundation being “regarded as making a gift to a non-qualified donee or providing an undue benefit, which are contraventions of the Act and could result in sanctions that include revocation of registered status.” However, if “the gift of the life insurance policy to the foundation was subject to a condition subsequent,” then apparently these adverse consequences would not attend a return of the gift. CRA did not provide any guidance on this point, stating that it was a question of non-tax law.

CRA indicated that if the gift was returned, then s. 118.1(26) would reverse the tax benefit to the donor from the donation in the year it was made - although CRA did not dwell on the fact that the gift was made in 1981. There is an ambiguity in the coming into force language for s. 118.1(26), which applies to transfers of property occurring after March 21, 2011, without specifying whether this is referencing the original transfer or the transfer back. Furthermore, s. 118.1(28) provides that if s. 118.1(26) applies respecting a transfer of property to an individual, CRA may reassess a return of any person to the extent that the reassessment can resonably be regarded as relating to the transfer. CRA did not discuss whether technically the individual's 1981 return could be reassessed. (Practically, there presumably is no longer any record of the return.)

Neal Armstrong. Summaries of 31 March 2017 External T.I. 2016-0630351E5 under s. 118(26) and s. 149.1(1) – charitable foundation.