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.
Principal Issues: Confirmation of the tax implications of the donation of non-qualified securities by an alter ego trust subsequent to the death of the settlor.
Position: See response for comments provided
Reasons: See response for comments provided
2004-006062
XXXXXXXXXX Luisa A. Majerus, C.A.
(613) 946-3558
May 10, 2004
Dear XXXXXXXXXX:
Re: Donation from an Alter Ego Trust
This is in reply to your letter of February 3, 2004 requesting our interpretation of various provisions of the Income Tax Act (the "Act") with respect to a donation to a private foundation of property from an alter ego trust, as described in subparagraph 104(4)(a)(iv) of the Act, subsequent to the death of the settlor of the trust.
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.
As we have stated in previous technical interpretations, in circumstances where the only direction in the trust document for the making of gifts to a qualified donee is the empowerment of the trustees to make gifts at their sole discretion, the trust will be entitled to the donation tax credit pursuant to subsection 118.1(3) of the Act.
As a consequence of the death of the settlor, an alter ego trust is deemed, pursuant to subsection 104(4), to dispose of property held in the trust for proceeds equal to the fair market value at the time of death. Provided such property is capital property to the trust, if it is subsequently donated to a qualified donee, an election under subsection 118.1(6) of the Act will be available to the trust provided the fair market value of the property at the time gifted exceeds the adjusted cost base of the property. The adjusted cost base of the property to the trust would be, pursuant to subsection 104(4), the fair market value thereof at the time of the death of the settlor. Accordingly, any election available under subsection 118.1(6) will not reduce the gain to the trust determined pursuant to subsection 104(4).
Where shares of a private company are donated by an alter ego trust to a private foundation and the trust does not deal at arm's length with the foundation and the corporation immediately after the donation, the shares will meet the definition of non-qualifying security in subsection 118.1(18) of the Act. Subsection 118.1(13) will deny the charitable donation until such time as the share ceases to be a non-qualifying security of the donor or the donee disposes of the security to an arm's length person. Either of the latter two events must occur within 60 months of the gift of the shares to the donee.
Where either of paragraphs 118.1(13)(a) or (b) applies in a subsequent taxation year of the trust to deem the trust to have made a gift, the gift will be deemed to have been made by the trust in that subsequent taxation year. Subsection 118.1(15) does not apply in this case and there is no similar provision in the Act that permits the resulting donation tax credit to be carried back to the taxation year of the trust in which the shares were transferred to the foundation.
We have brought this issue to the attention of the Minister of Finance.
We trust these comments will be helpful.
Yours truly,
F. Lee Workman
Financial Institutions Team
Income Tax Rulings Directorate
Policy & Planning Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2004
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2004
Email this Content