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: 1. What is the "time" that is referred to in paragraph 118.1(18)(b) of the Act?
2. Where 100% of the shares of a corporation are donated to a private foundation for no consideration, will the foundation be subject to revocation of its charitable registration pursuant to paragraph 149.1(4)(c) of the Act?
3. Where the former shareholder of the corporation continues to manage the affairs of the corporation and continues to be a director of the private foundation that received the shares of the corporation, what would be the tax implications?
4. Will the donation of property with a significant value, to a private foundation by an existing and continuing director of the private foundation, change the registered status of the private foundation or the designation of the charity as a private foundation?
Position: 1. The relevant "time" is the time that the gift is made such that the relationship between the donor and the property gifted is assessed immediately after the time that the gift is made to the charity.
2. Paragraph 149.1(4)(c) will not apply provided not more than 5% of the shares of the corporation have been acquired by the foundation for consideration.
3. None.
4. No
Reasons:
1. Previous positions.
2. Paragraph 149.1(12)(a).
3. Question of fact.
4. Could result in a re-designation of the charity from a charitable organization or a public foundation to a private foundation, depending upon the particular facts, however in this case the charity is already a private foundation.
August 3, 2004
Charities Directorate Income Tax Rulings
Policy & Communications Division Directorate
Alison Campbell
Attention: Jane Waterfall 957-3496
2004-008018
Donation of Private Corporation Shares to a Private Foundation
We are writing in reply to your memorandum of June 3, 2004 requesting our views on several issues related to the donation of the shares of a private corporation to a private foundation by one of five directors of the foundation.
The Income Tax Rulings Directorate is only able to provide binding advance income tax rulings in respect of proposed transactions which have been submitted in accordance with Information Circular IC 70-6R5, but we can provide you with the following general comments which we hope will be of assistance to you in responding to your client's tax concerns.
Non-qualifying Security Definition
One question raised in the information you sent to us is whether the donation of the shares would be a donation of non-qualifying securities for purposes of paragraph 118.1(18)(b) of the Income Tax Act (the "Act"). Paragraph 118.1(18)(b) of the Act provides that a share of the capital stock of a corporation (other than a share listed on a prescribed stock exchange) will be a non-qualifying security of an individual at any particular time if the individual or the individual's estate does not deal at arm's length with the corporation immediately after that time. Generally, it is our view that where a share of the capital stock of a private corporation is being gifted to a private foundation, the "time" referred to in paragraph 118.1(18)(b) of the Act is the "time" at which the share is gifted to the private foundation. Where the donor of the share of the private corporation is dealing at arm's length with the private corporation immediately after the share was gifted to the private foundation, the share would not be considered a "non-qualifying security" at the time the share was gifted to the private foundation.
Meaning of Arm's Length
The term "arm's length" is defined for purposes of the Act in subsection 251(1) of the Act. Where none of the parties are "personal trusts", there are essentially two tests to be considered in determining whether the parties are at arm's length. One test is whether the parties are "related" for purposes of the Act and, where the parties are not "related" for purposes of the Act, the second test is whether the parties are factually dealing at arm's length. The CRA has an interpretation bulletin that discusses the concepts of "arm's length" and "related" for purposes of the Act. I have attached a copy of this bulletin which is IT-419R "Meaning of Arm's Length" which should be of assistance to your client.
Private Foundation - Acquisition of Control of a Corporation
Pursuant to paragraph 149.1(4)(c) of the Act, the charitable registration of a private foundation may be revoked if the foundation acquires control of a corporation. However, in certain circumstances paragraph 149.1(12)(a) of the Act will apply to deem a private foundation not to have acquired control of a corporation for purposes of paragraph 149.1(4)(c). This deeming rule will apply only where the foundation has not purchased or otherwise acquired for consideration more than 5% of the issued shares of any class of the corporation. Therefore, where 100% of the shares of the corporation have been acquired by a foundation for no consideration, the acquisition of the shares will not in and of itself cause the foundation to be exposed to revocation of its charitable registration.
Private Foundation - Carrying on Any Business
Paragraph 149.1(4)(a) of the Act provides that the charitable registration of a private foundation may be revoked if the foundation is carrying on any business. The ownership, by a private foundation, of 100% of the issued shares of a taxable corporation will not in and of itself cause the private foundation to be considered to be carrying on the business of the wholly-owned subsidiary. It remains a question of fact however, whether any particular private foundation is carrying on a business and therefore exposed to revocation of its charitable registration.
Private Foundation - Donation by a Director
There are no provisions in the Act which would prohibit a director of a charity from making a donation to the charity. A large donation made to a charity by one of its directors will generally not result in the revocation of the charity's registration. However, a non-arm's length relationship between the director and the charity or between the donating director and the other directors, officers and trustees of the charity may affect the designation of a charity as a charitable organization, public foundation or private foundation. In particular, donations from person's not dealing at arm's length with the recipient registered charity, may result in the registered charity's designation as a charitable organization or public foundation being changed to the designation of a private foundation. Where the charity in question is a private foundation at the time the gift is made, the gift should not alter the charity's designation as a private foundation.
Foundation Director - Employed by Foundation's Wholly-owned Subsidiary
The director of a private foundation is not precluded from being a salaried employee of a subsidiary corporation of the foundation by any provision of the Act. The employment of the director/donor by the subsidiary corporation following the donation of the shares of the corporation to the foundation will however be relevant to the determination of whether the director/donor received an advantage related to the gift of the shares and whether the foundation gave consideration for any of the shares it acquired. As discussed previously, if the foundation acquires more than 5% of the issued and outstanding shares of any class of a corporation for consideration, the rule in paragraph 149.1(12)(a) which precludes the foundation from being considered to have acquired control of the corporation, will not apply.
The actual impact of a director of a foundation being employed by the subsidiary of the foundation could only be ascertained after a thorough review of all the relevant facts. This Directorate could only review and assess the tax implications of the specific proposals set out in the client's letter, if the client made a full submission requesting an advance income tax ruling. In addition to the Interpretation Bulletin IT-419R "Meaning of Arm's Length" we have also attached a copy of Information Circular IC 70-6R5 "Advance Income Tax Rulings" for you to pass along to your client.
We hope that our comments are of assistance.
for/F. Lee Workman
Manager
Financial Institutions Section
Income Tax Rulings Directorate
Policy and Planning Branch
Enclosures
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