2002 Ruling 2002-0141763 - GIFT SUBJECT TO CONDITIONS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

1. Whether a donation constitutes a gift for income tax purposes when the donation is subject to various conditions.

2. Where six corporations, their controlling shareholder and a public foundation enter into an agreement with respect to a donation, will subsection 15(1) apply to include the amount of the donation made by any of the corporations in the shareholder's income?

Position:

1. Factual determination. In this case, based on the facts, the donation would constitute a gift for income tax purposes.

2. No. The terms of the agreement provide that any of the corporations may make the gift.

Reasons:

1. In previous files, we concluded that the fact that there are conditions attached to a gift, does not, it itself, negate the gift. Generally, a donation would qualify as a gift if the donor is freely parting with the funds or property, receives no benefit, other than recognition, in return and the funds or property can never revert to the donor or any related person.

2. The corporations, the shareholder and the public foundation are all parties to the agreement.

XXXXXXXXXX 							2002-014176

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your facsimile letter dated XXXXXXXXXX in which you requested an advance income ruling on behalf of the above-noted taxpayers. Your request is further to your original request of XXXXXXXXXX (our file 2001-006663).

You advise that to the best of your knowledge and that of the taxpayers referred to above, none of the issues involved in the ruling request is:

i. in an earlier return of the taxpayers or a related person;

ii. being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayers or a related person;

iii. under objection by the taxpayers or a related person;

iv. before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

v. the subject of a ruling previously issued by the Directorate.

In this letter, unless otherwise indicated, all statutory references are to the provisions of the Income Tax Act (R.S.C. 1985, 5th Supplement, c.1, as amended) (the "Act"), and the following terms have the meanings specified:

a) "Individual" means XXXXXXXXXX,

b) "A Co" means XXXXXXXXXX,

c) "B Co" means XXXXXXXXXX,

d) "C Co" means XXXXXXXXXX,

e) "D Co" means XXXXXXXXXX,

f) "E Co" means XXXXXXXXXX,

g) "F Co" means XXXXXXXXXX,

h) "Corporations" means A Co, B Co, C Co, D Co, E Co, and F Co,

i) "Donors" means the Individual and the Corporations,

j) "Public Foundation" means XXXXXXXXXX,

k) "Charity A" means XXXXXXXXXX,

l) "Charity B" means XXXXXXXXXX,

m) "Association" means XXXXXXXXXX,

n) "Fund" means XXXXXXXXXX, and

o) "CCRA" means Canada Customs and Revenue Agency.

Our understanding of the facts, proposed transactions and their purposes is as follows:

FACTS

1) The Individual is a resident of Canada living in the province of XXXXXXXXXX. The Individual's tax services office is the XXXXXXXXXX Tax Services Office and his taxation centre is in XXXXXXXXXX.

2) A Co, B Co, D Co, and E Co are "taxable Canadian corporations" and "private corporations" within the meaning of subsection 89(1). The taxation year of each of A Co, D Co and E Co ends on XXXXXXXXXX. The taxation year of B Co ends on XXXXXXXXXX. Their offices are in XXXXXXXXXX and their tax centre is the XXXXXXXXXX Taxation Centre. The Individual holds XXXXXXXXXX% of the issued shares of A Co, B Co, and E Co and XXXXXXXXXX% of the issued shares of D Co with XXXXXXXXXX% of the votes. You advise that the Individual has voting control of D Co through a trust.

3) C Co and F Co are "taxable Canadian corporations" and "public corporations" within the meaning of subsection 89(1). The taxation year of each of C Co and F Co ends on XXXXXXXXXX. Their offices are in XXXXXXXXXX and their tax centre is the XXXXXXXXXX Taxation Centre. The Individual holds XXXXXXXXXX % of C Co's issued shares with XXXXXXXXXX % of the votes. The Individual does not hold directly any shares of F Co but C Co owns XXXXXXXXXX% of the issued shares of F Co.

4) The Public Foundation is a corporation incorporated as a no share corporation under the laws of XXXXXXXXXX. It is a "public foundation" within the meaning of subsection 149.1(1). The Public Foundation's office is in XXXXXXXXXX and its charitable registration number is XXXXXXXXXX.

5) Charity A is a corporation incorporated under the laws of Canada and is a "charitable organization" within the meaning of subsection 149.1(1). Charity A's office is in XXXXXXXXXX and its charitable registration number is XXXXXXXXXX.

6) Charity B is a "charitable organization" within the meaning of subsection 149.1(1). Charity B's office is in XXXXXXXXXX and its charitable registration number is XXXXXXXXXX.

7) The Association is a non-share capital corporation created by letters patent dated XXXXXXXXXX. The Association is governed by a board of directors nominated by members which are, or are controlled by, Charity A and the Public Foundation. The sole objective of the Association is to establish and operate XXXXXXXXXX to provide certain programs for the benefit to XXXXXXXXXX and the general public. Upon a dissolution or winding-up, all property of the Association will be distributed to one or more "qualified donees" as defined in the Act. You advise that the Association considers itself to be a non-profit organization within the meaning of paragraph 149(1)(l).

8) The Association owns land and buildings located in XXXXXXXXXX which it leases to Charity B (the "Head Lease"). Charity B, in turn, subleases the property to Charity A (the "Sublease") which uses the property as a XXXXXXXXXX. You advise that the property was originally owned by Charity B and was transferred to the Association in XXXXXXXXXX as a means of creditor proofing.

9) The XXXXXXXXXX requires renovation, remodeling and, in some cases, new construction to conform with current municipal building codes in order to provide a XXXXXXXXXX.

10) The plans for a renovation project (the "Project") have been prepared and the Project is to be completed over a period of not more than XXXXXXXXXX years with the combined support and effort of various parties including the Public Foundation.

11) The Donors have been approached by the Public Foundation and Charity A for a charitable contribution to assist in the funding of the Project and, following the completion of the Project, the maintenance and operation of the completed Project and related facilities.

12) In addition to any gift contemplated by the proposed transactions described below, the Individual has already made an irrevocable gift of $XXXXXXXXXX to the Public Foundation (the "$XXXXXXXXXX Donation"). The Public Foundation has established and maintained a separate and segregated endowment trust fund named the Fund which will initially hold all gifts mentioned in this letter. The $XXXXXXXXXX Donation will be disbursed to Charity A to be applied to payment of expenditures related to the Project provided that if the Project does not proceed, the Public Foundation will disburse any remaining portion of the $XXXXXXXXXX Donation to such other registered charities or qualified donees supported by the Public Foundation as may be designated by the Individual.

PROPOSED TRANSACTIONS

13) The Individual, the Public Foundation, Charity A, Charity B and the Association entered into a donation and charitable trust agreement dated XXXXXXXXXX (the "Original Agreement"). This agreement, by its terms, will only take effect on receipt of a favourable written tax ruling from the CCRA that the proposed donation qualifies as a charitable gift under the Act.

14) Pursuant to the terms of the Original Agreement, the Individual or one or more corporations owned, controlled, affiliated or associated by or with him, will donate and gift to the Public Foundation $XXXXXXXXXX (the "Gift"), payable in XXXXXXXXXX annual instalments of $XXXXXXXXXX to be held by the Public Foundation in trust for Project expenditures. The Public Foundation will hold the funds in the Fund, until all funds attributable to the Gift, both capital and income, in the Fund have been expended in accordance with the terms and provisions of the Original Agreement. In this regard, funds will be used for the payment for or reimbursement of construction costs incurred in connection with the Project. Charity A will enter into contracts for the Project and it will present invoices it receives to the Public Foundation which will release amounts from the Fund to pay the expenditures.

15) The Individual, the Corporations, the Public Foundation, Charity A, Charity B, and the Association will enter into an agreement ("Amending Agreement") which amends certain provisions of the Original Agreement. In particular, the Corporations will agree to be bound by the terms of the Original Agreement and references in the Original Agreement to the Individual will be read as a reference to the Individual and the Corporations, unless the context otherwise requires. The Original Agreement and the Amending Agreement are hereinafter referred to as the "Agreements".

16) Payments of the Gift will be made in cash or in securities of Canadian companies listed on a North American Stock Exchange that is a prescribed stock exchange under section 3201 of the Income Tax Regulations.

17) If shares of a publicly traded corporation are used as payment, such shares will be sold if possible on the day they are delivered to the Public Foundation or as soon as reasonably possible thereafter with the assistance and cooperation of the Donors. In determining the value for charitable donation receipt purposes, the shares will be valued at their closing price at the end of the day the shares are delivered free and clear to the account of the Public Foundation.

18) Pending transfer of the gifted funds for use in the Project, the Public Foundation will retain, invest, administer and manage the funds or such portions thereof remaining from time to time in accordance with the Public Foundation's investment policies and procedures as amended from time to time. To the extent the whole of the annual net income is not fully expended in a year, such excess will be added to the trust funds.

19) If at any time after the start of construction of the Project but prior to the Project being substantially complete there remain undrawn trust funds and the Public Foundation has been declared bankrupt or insolvent or has entered into liquidation, then during such period no funds may be withdrawn from the Fund for any purpose whatsoever without the prior written consent of the Donors, and if such default is not cured within a certain period, then the Donors will in writing designate one or more registered charities qualified to issue receipts under the Act to which the Public Foundation may make contribution and the Public Foundation will pay to such designee specified by the Donors forthwith, after such written designation has been made by the Donors, all of such remaining undrawn trust funds.

20) Charity A will be responsible for designing, obtaining and approving architectural plans, all required building permits, including without limitation municipal, provincial and federal permits and all approvals and consents from any person or persons whose approvals or consents are required.

21) No mortgage will encumber the properties prior to the XXXXXXXXXX anniversary of the start of construction of the Project, without the prior written consent of the Donors, except for mortgages or charges given as collateral or additional security to secure construction funds advanced by a Canadian chartered bank, trust company, credit union or other recognized and governmentally regulated financial institution carrying on business in XXXXXXXXXX for a construction loan XXXXXXXXXX% of the face value and proceeds of such loan are used directly for the construction of the Project.

22) During each year of construction of the Project, the Public Foundation and Charity A will cause to be prepared annually, in respect of the Project, financial reports and will deliver the same to the Donors.

23) For a period of XXXXXXXXXX years, the Donors will be kept informed on a regular basis by Charity A of the results of any consideration or intention, on the part of Charity A, to carry out any reorganization, restructuring, merger or amalgamation.

24) Following completion of the construction of the Project, Charity A alone will be responsible for the operation and maintenance of the completed Project and at all times thereafter will operate and maintain the Project. Neither the Donors nor persons related to the Donors will participate, directly or indirectly, in the actual construction or operation of the Project.

25) The Head Lease between the Association and Charity B will be revised or replaced to provide for a term of XXXXXXXXXX years and XXXXXXXXXX days and the Sublease between Charity B an Charity A will be revised or replaced to provide for a term of XXXXXXXXXX years and XXXXXXXXXX.

26) In recognition of the Gift, Charity A, will name, in perpetuity, the existing XXXXXXXXXX.

27) Charity A will use the name XXXXXXXXXX on all stationery, invoices, letterhead, business and calling cards of all professional and non-professional staff and associates, calendars, advertising, marketing, promotion, press releases, public relations materials, signs, publications, documents, forms, brochures, printed and photographic materials, film, video and audio materials, notation pads, directly or indirectly used in or in association with XXXXXXXXXX.

28) As the affairs of each of Charity A and the Association are managed by a board of directors or governors consisting of XXXXXXXXXX or more directors, each of Charity A and the Association will use its respective best efforts to cause the Individual or a person designated by the Individual as the Individual's appointee, to be elected and/or appointed as an advisor or non-voting member or, if requested by the Individual, as a director or governor of its board of directors or governors in each year until XXXXXXXXXX. You advise that such positions are volunteer positions, there is no fee for serving in such positions and the Individual deals at arm's length with each of the other board members.

29) If the Donors fail or refuse without reasonable cause to make any instalment of the Gift, or should the Donors fail or refuse for any reason whatsoever to contribute a total of $XXXXXXXXXX to the Public Foundation to be used as provided in the Agreements, then the Public Foundation and Charity A will have the absolute right to possession of all donations made by the Donors to the date of such termination without further claim, condition or impediment by the Donors. Further, the Donors will have no obligations whatsoever to make further or additional payments to the Public Foundation and Charity A will have the right at any time thereafter to change the name of XXXXXXXXXX.

30) If the start of construction does not occur within XXXXXXXXXX months after the execution of the Agreements, the parties thereto will have no further rights or obligations under the Agreements except as follows:

a) Charity A will have the right at any time thereafter to change the name of XXXXXXXXXX, and

b) the Donors will have the right to designate a beneficiary or beneficiaries of all instalments of the Gift made by the Donors to date which remain in the hands of the Public Foundation and Charity A, such beneficiary or beneficiaries to be to be one or more registered charities or qualified donees entitled to issue charitable receipts under the Act and which are supported by the Public Foundation.

31) Any payment of the Gift, once received by the Public Foundation, will be irrevocable in that the Individual, the Corporations, any related person and their assigns will not be entitled to the return of any of the amounts donated to the Public Foundation.

PURPOSE OF THE PROPOSED TRANSACTIONS

32) The purpose of the proposed transactions is to assist the Public Foundation in funding its campaign to expand, remodel and repair XXXXXXXXXX used by Charity A.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, we confirm that:

A. An amount equal to the fair market value on the date of the donation of an instalment of the Gift as described in 14 above donated by the Individual to the Public Foundation will qualify as a gift for the purposes of the definition of "total charitable gifts" in subsection 118.1(1) provided an official receipt containing prescribed information is filed as required by subsection 118.1(2).

B. An amount equal to the fair market value on the date of the donation of an instalment of the Gift as described in 14 above donated by any of the Corporations to the Public Foundation will qualify as a gift as described in paragraph 110.1(1)(a), provided an official receipt containing prescribed information is filed as required by subsection 110.1(2).

C. The Public Foundation may issue an official receipt within the meaning of section 3501 of the Income Tax Regulations to a Donor for the donation of an instalment of the Gift described in rulings A and B above.

D. The undertaking by the Corporations to make the Gift pursuant to the Agreements, and the donation of the Gift will not, in and of themselves, constitute a benefit conferred on the Individual pursuant to subsection 15(1).

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 dated May 17, 2002 and are binding on the Customs and Revenue Agency provided that the Agreements are executed and become effective before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
Manager
Financial Institutions Team
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch