2002 Ruling 2002-0171053 - 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 a corporation, its controlling shareholder and a private foundation enter into an agreement with respect to a donation, will subsection 15(1) apply to include the amount of the donation made by the corporation in the shareholder's income?

Position:

1. Based on the facts, the donation would constitute a gift for income tax purposes.

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

Reasons:

1. In previous files, we concluded that the fact that there are conditions attached to a gift does not, 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 corporation, the shareholder and the private foundation are all parties to the agreement.

XXXXXXXXXX 						2002-017105

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge receipt of your letters of XXXXXXXXXX.

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) "Corporation" means XXXXXXXXXX,
b) "Shareholder" means XXXXXXXXXX,
c) "Organization" means XXXXXXXXXX,
d) "Foundation A" means XXXXXXXXXX,
e) "Foundation B" means XXXXXXXXXX,
f) "Foundation C" means XXXXXXXXXX,
g) "Individual" means XXXXXXXXXX , and
h) "CCRA" means Canada Customs and Revenue Agency.

Our understanding of the facts, proposed transactions and their purposes is set out below.

Facts

1) The Corporation is a "taxable Canadian corporation" and a "private corporation" within the meaning of subsection 89(1). Its office is in XXXXXXXXXX and its tax services office is in XXXXXXXXXX. The Corporation is a holding corporation and is controlled by the Shareholder.

2) The Shareholder is a resident of Canada living in the City of XXXXXXXXXX.

3) The Organization is XXXXXXXXXX. It is a "charitable organization" within the meaning of subsection 149.1(1) and its charitable registration number is XXXXXXXXXX.

4) Foundation A is XXXXXXXXXX. Foundation A is being wound-up and dissolved and all of its assets and obligations will devolve to the Organization.

5) Foundation B is a "public foundation" within the meaning of subsection 149.1(1) and its charitable registration number is XXXXXXXXXX. Foundation B was established to, among other things, receive gifts for the benefit of the Organization.

6) Foundation C is a "private foundation" within the meaning of subsection 149.1(1) and its charitable registration number is XXXXXXXXXX. Foundation C was established by the Shareholder.

7) An agreement was made as of XXXXXXXXXX (the "XXXXXXXXXX Agreement") among the Shareholder, the Organization and Foundation A. As a result, the Corporation donated to Foundation A amounts totaling $XXXXXXXXXX (the "$XXXXXXXXXX Donation"). Further, subject to certain conditions, the Shareholder agreed to donate $XXXXXXXXXX (the "Bequest") to Foundation A by designating Foundation A in his last will and testament as a specific beneficiary or by designating Foundation A as a beneficiary of the gift, if any, made by the Shareholder in his last will and testament to a private charitable foundation. The $XXXXXXXXXX Donation was the subject of our ruling 952709 dated XXXXXXXXXX, 1995 and the Bequest was the subject of an opinion in the same letter that contained the ruling. The Corporation has made the $XXXXXXXXXX Donation to Foundation A.

8) Pursuant to an agreement made as of XXXXXXXXXX (the "XXXXXXXXXX Agreement") between Foundation C and the Organization, Foundation C agreed to donate an additional $XXXXXXXXXX to the Organization for the construction of an XXXXXXXXXX. This gift has also been made. No ruling was obtained in respect of this gift.

Proposed Transactions

9) The Shareholder, the Corporation, the Organization, Foundation B, and Foundation C will enter into an agreement (the "Amending Agreement"). The Amending Agreement will be subject to the receipt of a favourable ruling from the CCRA.

10) Pursuant to the terms of the Amending Agreement, the Organization will be released from certain defaults and obligations under the XXXXXXXXXX Agreement, including the obligation on the part of the Organization to make matching contributions of $XXXXXXXXXX to the XXXXXXXXXX of the Organization, provided that the Organization makes XXXXXXXXXX annual contributions in the amount of $XXXXXXXXXX each to the XXXXXXXXXX of the Organization. These annual contributions will satisfy fully the Organization's obligation to make annual revenue contributions under the XXXXXXXXXX Agreement.

11) The Amending Agreement also deals with the remote possibility that the Organization, the XXXXXXXXXX of the Organization or Foundation B may merge or be dissolved in the future. If, as a result of such an event, the XXXXXXXXXX of the Organization is not XXXXXXXXXX or a majority of the Organization's assets are transferred to another foundation or similar entity without the consent and approval of Foundation B, the event will be considered a breach of a covenant of the XXXXXXXXXX Agreement. In the event of a breach, the Organization agrees to pay $XXXXXXXXXX with interest to one or more registered charities, each of which must be a Canadian XXXXXXXXXX , as directed by the Shareholder, his heirs, executors, administrators and assigns. The Amending Agreement further provides that XXXXXXXXXX and Foundation B will take all reasonable steps to ensure Foundation B does not dissolve or wind-up unless its obligations to the Shareholder and Foundation C are assumed fully by an entity acceptable to the Shareholder and Foundation C.

12) In addition, the Amending Agreement provides for changes regarding naming rights in the XXXXXXXXXX Agreement.

13) Subject to the terms and conditions of the Amending Agreement, the Corporation will donate $XXXXXXXXXX to Foundation B in one or more instalments by XXXXXXXXXX (the "Gift"). The Corporation intends to make the Gift by the end of XXXXXXXXXX subject to stock market conditions and their impact on the portfolio of stocks owned by it.

14) Foundation B will disburse an amount equal to the Gift to the Organization to be used exclusively for the purposes specified in the Amending Agreement and in the XXXXXXXXXX Agreement. In particular, the Gift will be used to provide more immediate financial assistance to the Organization, to provide funding for a chair and additional XXXXXXXXXX scholarships as described in 15 below, and to provide funding to retain the services of the Individual following his retirement as described in 16 below.

15) Pursuant to the Amending Agreement, on or before XXXXXXXXXX, the Organization will:

i) designate and staff for not less than XXXXXXXXXX consecutive years a Chair in XXXXXXXXXX with a minimum annual funding of $XXXXXXXXXX, provided that such Chair will be funded by the Organization in perpetuity when and from the time the Gift has been paid in full;

ii) name such Chair in honour of a designee selected by the Shareholder and approved by the Organization; and

iii) increase the number and value of XXXXXXXXXX, adjusted for the cost of living in XXXXXXXXXX according to the Consumer Price Index.

16) Given that the Organization wishes to retain the services of the Individual, XXXXXXXXXX, the Shareholder and the Corporation are prepared to provide funding for that purpose. In this regard, the Amending Agreement provides that on or before XXXXXXXXXX, the Organization will retain the Individual, after his retirement to provide consulting services with respect to the business, governance, reputation of, fundraising and benefactor relations with the XXXXXXXXXX and pay an annual consulting fee equal to the greater of (i) $XXXXXXXXXX minus XXXXXXXXXX% of the sum of all monies, other than regular pension and retirement payments, paid to that Individual and (ii) $XXXXXXXXXX. You advise that each of the Shareholder and the Corporation deals at arm's length with the Individual.

17) The Gift will be irrevocable in that the Corporation, the Shareholder, any related person and their assigns will not be entitled to the return of the amounts donated to Foundation B.

Purpose of the Proposed Transactions

18) The Organization would like to obtain the $XXXXXXXXXX prior to the death of the Shareholder which, realistically, could be at least XXXXXXXXXX or more years away. The Organization has many funding needs in respect of its XXXXXXXXXX. In particular, the Organization identified the need for a Chair in XXXXXXXXXX and for more and better scholarships. The Organization believes that XXXXXXXXXX has been instrumental in raising the profile and quality of the XXXXXXXXXX and that it is desirable that his consulting services be retained after he retires. In addition, the Organization would like the Shareholder or the Corporation to commit to make the Gift to Foundation B because Foundation A is being wound-up. The Shareholder and the Corporation agree that these needs should be funded and are prepared to make the Gift for the purposes suggested by the Organization.

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 13 above donated by the Corporation to Foundation B 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).

B. The undertaking by the Corporation to make the Gift pursuant to the Amending Agreement, and the donation of the Gift will not, in and of themselves, constitute a benefit conferred on the Shareholder 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 CCRA provided that the Amending Agreement is executed and becomes effective before XXXXXXXXXX.

Yours truly,

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