12 September 2002 External T.I. 2002-0155715 - DONATIONS TO FUND MANAGED BY CROWN

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: Comments on proposed donations to a fund managed by a Ministry of the Crown in right of a province.

Position: General Comments

Reasons: Proposed Transaction

XXXXXXXXXX 2002-015571
R. Maley
September 12, 2002

Dear XXXXXXXXXX:

Re: Donations to fund managed by Crown

This is in reply to your letter of July 31, 2002 respecting the tax implications of XXXXXXXXXX.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an Advance Income Tax Ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.

Section 3 of IT-110R3, "Gifts and Official Donation Receipts", explains that a gift, for purposes of sections 110.1 and 118.1, is a voluntary transfer of property without valuable consideration. Generally a gift is made if all three of the conditions listed below are satisfied:

(a) some property - usually cash - is transferred by a donor to a registered charity (or other qualified donee);

(b) the transfer is voluntary; and

(c) the transfer is made without expectation of return. No benefit of any kind may be provided to the donor or to anyone designated by the donor, except where the benefit is of nominal value.

Several of these criteria may be relevant to the donations proposed in your letter. First, a gift is a donation to a registered charity or other qualified donee. Her Majesty in right of a province is a qualified donee for the purposes of the donation deduction and donation tax credit. It is not clear, from your letter, whether the proposed gifts will be made to XXXXXXXXXX in its own capacity, or in its capacity as the manager of the fund. If the gift is made to the fund, there may be a question whether the fund is a qualified donee for tax purposes. If the fund is, legally, a separate entity from XXXXXXXXXX, gifts to it (whether directly, or through XXXXXXXXXX) would be viewed as gifts to Her Majesty in right of a province only if the fund is an agent of the Crown.

Second, a gift includes only voluntary transfers of property. A voluntary transfer of property would not include the payment of any amount over which the donor retains a legal entitlement. You have advised that the donations proposed, while "earmarked" for XXXXXXXXXX, could be used for any purpose by the donee and cannot revert to the donors. In general, the Canada Customs and Revenue Agency (CCRA) accepts that donations directed or motivated for particular purposes may qualify as gifts provided the recipient is legally entitled to use the funds in any manner and provided that there is no possibility that the funds could revert to the donor or any related person.

Third, a gift would not include a donation made for the purpose of receiving a return or benefit. Your letter does not indicate whether the members of the XXXXXXXXXX, i.e., the potential donors, would be the same group of persons (or part thereof) that could be contracted to perform the work to be funded by the donations. Are there expectations that the fund would show a preference to the donors in awarding future contracts? If so, there may be a question whether particular donations are gifts, or whether they are expenditures made for another purpose, such as the purpose of earning income. The answer to this question would depend upon the circumstances of any particular donation.

A related question to this issue is whether public recognition of the donors, either through signage at the XXXXXXXXXX sites or by government press releases, would be a benefit that would prevent the donations from being viewed as gifts. In general, the CCRA does not view name recognition, in and of itself, as negating a gift. This general rule is, of course, subject to the particular facts of a situation. If a donation is made in the expectation that such recognition will generate income for the donor, the better view may be that the donation at issue is not a gift, but rather, an expense incurred to earn income.

Finally, a gift includes only transfers of property. Paragraph 15(d) of IT-110R3 confirms that donations of services do not constitute gifts. You have asked whether services can be rendered for cash, with the cash being "gifted back". As noted above, a donation of cash is a donation of property and therefore can be the subject of a gift. Paragraph 15(1)(d) of IT-110R3 confirms that a person who has received remuneration or business income from a charity in consideration for services may gift that amount back to the charity and include the receipted amount in computing the applicable donation tax credit or deduction for the year. However, a couple of factors should be kept in mind. First, to constitute a gift, the payment must be voluntary i.e., the donor must otherwise have been entitled to use the donated amount in any way. Donations made pursuant to a legal obligation do not constitute gifts - see section 9 of IT-110R3. Second, the donation would not affect the amount that would be included in the person's income for the year in respect of the services rendered.

While the foregoing comments are not binding on the CCRA, we trust that they are helpful.

Yours truly,

F. Lee Workman
Section Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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