2003 Ruling 2003-0043013 - 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 charitable organization 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?

3. Whether the amount of the advantage in respect of the naming rights granted to the shareholder is nil for the purposes of draft subsection 248(31).

Position:

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

2. Not in this case. The terms of the agreement provide that the corporation will make the gift.

3. Factual determination. In this case, the scholarships, funds, etc., will be named after the shareholder and other individuals. Provided that there is no prospective economic benefit associated with the naming rights, it is our opinion that the amount of the advantage would be nil.

Reasons:

1. In previous files, we concluded that the fact that there are conditions attached to a gift similar to those present in this case does not, itself, negate the gift.

2. The corporation, the shareholder and the charitable organization are all parties to the agreement.

3. We consulted with the Valuations Section on this issue and were advised that in order to have value, there must be a prospective, quantifiable economic benefit associated with the naming rights.

XXXXXXXXXX 							2003-004301

XXXXXXXXXX, 2003

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.

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) "Charity" means XXXXXXXXXX,

b) "Corporation" means XXXXXXXXXX,

c) "CCRA" means Canada Customs and Revenue Agency,

d) "Committee" means the XXXXXXXXXX,

e) "Faculty" means the XXXXXXXXXX,

f) "Foundation" means XXXXXXXXXX,

g) "Individual" means XXXXXXXXXX,

h) "The Endowment" means XXXXXXXXXX, and

i) "X School" means the XXXXXXXXXX.

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

Facts

1) The Individual is a resident of Canada living in the City of XXXXXXXXXX.

2) 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 company and is controlled by the Individual.

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

4) The Foundation is a "private foundation" within the meaning of subsection 149.1(1) and its charitable registration number is XXXXXXXXXX.

5) The Individual, the Corporation and the Charity have agreed to proceed, pursuant to an agreement made as of XXXXXXXXXX, with the proposed transactions described below.

Proposed Transactions

6) The Individual, the Corporation and the Charity will enter into an agreement (the "Agreement"). Pursuant to and subject to the terms and conditions of the Agreement, the Individual or the Corporation will donate to the Charity $XXXXXXXXXX payable in cash or in shares of a company listed on the XXXXXXXXXX Stock Exchange. The Agreement will be subject to the receipt of favourable rulings from the CCRA or written legal opinions satisfactory to each of the Individual, the Corporation and the Charity that:

a) the proposed donations qualify as charitable gifts under the Act; and

b) when the proposed donations are made by the Corporation, such donations do not constitute a shareholder benefit to the Individual.

7) Pursuant to the Agreement:

a) the Corporation will donate to the Charity $XXXXXXXXXX by the later of XXXXXXXXXX business days of receipt of the requested rulings or XXXXXXXXXX to be used by the Charity to fund XXXXXXXXXX;

b) the Corporation will donate an additional $XXXXXXXXXX on or before XXXXXXXXXX; and

c) an additional $XXXXXXXXXX will be donated to the Charity by the Corporation on or before the Individual's death or by the Individual by irrevocable bequest in his last will and testament.

The Agreement will also provide that at any time prior to the making of the $XXXXXXXXXX donation referred to in (b) above, the Agreement may be terminated by the Individual and the Corporation. The donations described in (a) and (b) above are referred to hereinafter as the "Gift".

8) Upon receipt of each of the payments referred to in 7(b) and (c) above, the Charity will designate such amounts as, and hold such amounts in trust in perpetuity in, The Endowment.

9) The Charity will make matching contributions to The Endowment. The Charity will also arrange for transfers of funds from the Province of XXXXXXXXXX. In addition, the Charity will establish a segregated trust fund (the "XXXXXXXXXX") and deposit to it up to $XXXXXXXXXX of the Gift to support XXXXXXXXXX.

10) Pursuant to the Agreement, the Charity is to use the annual income or capital of The Endowment to fund XXXXXXXXXX, and certain other activities and expenses. Any income earned on the capital of The Endowment that is not disbursed in accordance with the terms of the Agreement will be added to the capital of The Endowment.

11) The Corporation or the Individual may make an additional "top up" donation to the Charity on or before XXXXXXXXXX in an amount not to exceed $XXXXXXXXXX if the remaining capital in The Endowment is less than a specified amount.

12) XXXXXXXXXX.

13) The Charity further agrees to create a Committee to advise the Charity and X School on policy and strategic direction in XXXXXXXXXX. The Committee will consist of not less than XXXXXXXXXX members. XXXXXXXXXX of the members of the Committee will be nominees of the Individual or the Corporation and if the number of members is not evenly divisible by the number XXXXXXXXXX the members will be nominees of the Individual or the Corporation. You advise that such positions will be volunteer positions and there is no fee for serving in such positions.

14) The Charity will establish, maintain and fund XXXXXXXXXX and a prominent qualified person will be appointed by the Charity to this position. XXXXXXXXXX.

15) Pursuant to the Agreement, the names given by the Individual in respect of the XXXXXXXXXX will be permanent and irrevocable. The renaming of the School of XXXXXXXXXX of the Charity to X School will also be permanent and irrevocable unless the donations described in 7 are not made in full.

16) The Charity will renovate and acquire premises for the X School. You advise that there will be no financial benefit to the Individual or any related persons from such renovations and acquisitions. The Individual and the Corporation will not be involved at all in this project.

17) In the unlikely event that any of the material agreements and covenants of the Charity is not performed, the Charity agrees to pay to the Foundation the total amount of the donations described in 7 above that were paid to the Charity with interest as well as the Corporation's legal costs and expenses in relation to the enforcement of any material agreements and covenants. You advise that in such circumstances the amount paid to the Foundation will not be designated by the Charity as a "specified gift" as defined in subsection 149.1(1) and that the Foundation will expend such amount on charitable activities or by way of gifts to qualified donees in the year of receipt or the immediately following taxation year.

18) Pursuant to the Agreement, the Individual and the Corporation will not participate actively in or be employed in the actual operations, day to day, of the Charity or the X School. In this regard, it is contemplated that the Individual will be involved in fund raising activities of the Charity but not in the management or operation of the Charity. The Individual might, if asked by the Charity, provide free business advice to the Charity.

19) The Gift will be irrevocable in that the Corporation, the Individual, any related person other than the Foundation, and their assigns will not be entitled to the return of the amounts donated to the Charity.

Purpose of the Proposed Transactions

20) The purpose of the proposed donations is that the Individual and the Corporation wish to support and encourage the advancement in XXXXXXXXXX at the Charity.

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. Provided that there is no prospective economic benefit associated with the naming rights described in the Agreement, the amount of cash donated or the fair market value of the shares donated on the date of donation as described in 7(a) or (b) above by the Corporation to the Charity will qualify as a gift as described in paragraph 110.1(1)(a) if an official receipt containing prescribed information is filed as required by subsection 110.1(2).

B. The undertaking of the Corporation to make the Gift pursuant to the Agreement will not, in and of itself, constitute a benefit conferred on the Individual pursuant to subsection 15(1).

Opinion

Provided that there is no prospective economic benefit associated with the naming rights described in the Agreement, it is our opinion that the amount of the advantage of such naming rights would be nil for the purpose of subsection 248(31) of the draft legislation released by the Minister of Finance on December 20, 2002.

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 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