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:
Whether a donation constitutes a gift for income tax purposes when the donation is subject to various conditions.
Where a corporation, its controlling shareholder and two charities 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?
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:
Based on the facts, it is our view that the donation would constitute a gift for income tax purposes.
Not in this case. The terms of the agreement provide that the corporation will make the gift.
Factual determination. In this case, the faculty, scholarships, chairs, etc. will be named after the shareholder and another individual. 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:
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, in itself, negate the gift.
The corporation, the shareholder and the charities are all parties to the agreement.
In a previous ruling (2003-0043013), we consulted with the Valuations Section on this issue and were advised that in order to have value, there must be a prospective economic benefit associated with the naming rights.
XXXXXXXXXX 2005-011070
XXXXXXXXXX, 2005
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:
i. is in an earlier return of the taxpayers or a related person;
ii. is 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. is under objection by the taxpayers or a related person;
iv. is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and
v. is the subject of a ruling previously issued to the taxpayers, other than XXXXXXXXXX.
Unless otherwise stated, all references to a statute are to the provisions of the Income Tax Act, R.S.C. 1985, 5th Supplement, c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the relevant definitions, facts, proposed transactions and their purposes is set out below.
DEFINITIONS
a) "Charity" means XXXXXXXXXX,
b) "Corporation" means XXXXXXXXXX,
c) "CRA" means Canada Revenue Agency,
d) "Endowment" means XXXXXXXXXX,
e) "Faculty" means the XXXXXXXXXX,
f) "Foundation" means the XXXXXXXXXX,
g) "Individual" means XXXXXXXXXX, and
h) "X School" means XXXXXXXXXX.
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 a university located in 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.
PROPOSED TRANSACTIONS
5) The Individual, the Corporation, the Foundation and the Charity propose to enter into an agreement (the "Agreement"). Pursuant to and subject to the terms and conditions of the Agreement, 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 CRA with respect to the donation of $XXXXXXXXXX or written legal opinions satisfactory to each of the Individual, the Corporation and the Foundation that:
a. the proposed donations described in 6 below 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.
6) Pursuant to the Agreement:
a. the Corporation will donate to the Charity $XXXXXXXXXX (the "Gift") by no later than XXXXXXXXXX, to be used by the Charity to XXXXXXXXXX; and
b. an additional $XXXXXXXXXX (the "Additional Donation") will be donated to the Charity by the Corporation or the Foundation on or before the Individual's death, possibly in instalments, or by the Individual by irrevocable bequest in his last will and testament within XXXXXXXXXX years of such death.
7) Commencing on XXXXXXXXXX, the Charity will pay an annual amount of $XXXXXXXXXX to create and fund between XXXXXXXXXX and XXXXXXXXXX scholarships for undergraduate or graduate students entering or enrolled in the Faculty.
8) To ensure that funds are available to fund the scholarships referred to in 7 above on an annual basis, the Charity will make reasonable efforts to make a contribution of $XXXXXXXXXX to either create or add to the Endowment which will be held in perpetuity. Once the Charity has paid the $XXXXXXXXXX in full to the Endowment, the scholarships will continue to be paid from the endowed funds based on an annual minimum distribution of XXXXXXXXXX percent of the fair market value of the Endowment calculated at the end of the fiscal year of the Charity and thereafter the Charity's separate funding obligation described in 7 above will terminate.
9) Part or all of the Additional Donation when made will be used to create, or be added to, the Endowment and may be used to XXXXXXXXXX and other projects to benefit the Faculty.
10) Pursuant to the Agreement, the Charity is to use the annual income, and if necessary part of the capital, of the Endowment to fund the XXXXXXXXXX. 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) XXXXXXXXXX.
12) XXXXXXXXXX.
13) Pursuant to the Agreement, the names given by the Individual in respect of the following will be permanent and irrevocable:
a. XXXXXXXXXX,
b. XXXXXXXXXX, and
c. XXXXXXXXXX.
The renaming of the Faculty to X School will also be permanent and irrevocable unless the donations described in 6 above are not made in full.
14) In the unlikely event that any material agreements and covenants of the Charity in the Agreement are not performed, the Charity will agree to pay to the Foundation the total amount of the donations as described in 6 above that were received by the Charity plus interest. 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 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. In addition, the Charity will pay the donor's legal costs and expenses in relation to the enforcement of any material agreements and covenants in the Agreement. The Agreement provides that if the Foundation ceases to qualify as a registered charity or has been wound up, the amount otherwise payable to the Foundation will be paid to universities situated in Canada to which the Individual has made a donation of at least $XXXXXXXXXX, provided that such university is a registered charity.
15) Pursuant to the Agreement, the Individual, the Corporation and the Foundation will not participate actively in or be employed in the actual day today operations of the Charity including the X School.
16) The Gift will be irrevocable in that the Corporation, the Individual, any related persons other than the Foundation, and their assigns will not be entitled to the return of the amounts donated to the Charity.
17) You advise that there will be no financial benefit to the Individual or any related persons from the XXXXXXXXXX.
PURPOSE OF THE PROPOSED TRANSACTIONS
18) The purpose of the proposed donations is that the Individual, the Corporation and the Foundation wish to support and encourage the advancement in the XXXXXXXXXX at the Charity.
RULINGS GIVEN
Provided 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, in satisfaction of the Gift as described in 6(a) above, 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 February 27, 2004.
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 CRA provided that the Gift is made by XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
Manager
Financial Institutions Team
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
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