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. Whether the donation of land situated in Canada by a non-resident corporation to a Canadian charity qualifies as a gift for tax purposes.
2. Whether the proposed transactions result in the conferral of an advantage to the donor.
Position:
1. Yes, based on the facts provided.
2. Not in this case.
Reasons: For the purposes of determining the eligible amount of the gift by the donor under proposed subsection 248(31), it is our view that the proposed transactions will not, in and by themselves, result in the conferral of an advantage to the donor under proposed subsection 248(32).
XXXXXXXXXX 2006-017142
XXXXXXXXXX, 2006
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above named taxpayers. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request.
We understand that, to the best of your knowledge and that of the taxpayers involved, 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 Taxation 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; or
(v) is the subject of a ruling previously issued to the taxpayers by the Directorate.
Unless otherwise stated, all references to a statute are to 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. In this letter, all monetary amounts are expressed in Canadian dollars unless otherwise indicated.
Our understanding of the relevant definitions, the facts, proposed transactions and the purpose of the proposed transactions is as follows:
Definitions
a) "adjusted cost base" has the meaning assigned by section 54,
b) "Association" means the XXXXXXXXXX,
c) "Charity" means XXXXXXXXXX,
d) "Companies Act" means XXXXXXXXXX,
e) "Corporation" means XXXXXXXXXX,
f) "CRA" means the Canada Revenue Agency,
g) "Holdco" means XXXXXXXXXX,
h) "Individual A" means XXXXXXXXXX,
i) "Individual B" means XXXXXXXXXX,
j) "Individual C" means XXXXXXXXXX,
k) XXXXXXXXXX,
l) "Land I" means property situated on the XXXXXXXXXX,
m) "Land II" means property situated on XXXXXXXXXX,
n) "Land III" means property situated on the XXXXXXXXXX,
o) "Minister" means the Minister of National Revenue,
p) "Mortgage Agreement" means the agreement dated XXXXXXXXXX between the Corporation (as mortgagor) and Individual A (as mortgagee), securing all obligations owing by the Corporation to Individual A (no fixed principal amount or currency is set out in the agreement),
q) "Province" means Her Majesty in right of the Province of XXXXXXXXXX,
r) "taxable Canadian property" has the meaning assigned by subsection 248(1), and
s) "Trust" means the XXXXXXXXXX.
Facts
1) The Charity is a non-profit corporation formed under Part II of the Companies Act. Its office is located in XXXXXXXXXX. It is a "charitable organization" within the meaning of subsection 149.1(1) and its charitable registration number is XXXXXXXXXX. The Charity is a XXXXXXXXXX.
2) Holdco was formed under Part I of the Companies Act as a wholly-owned subsidiary of the Charity for the purpose of acquiring all the issued and outstanding shares of the Corporation. It is a "taxable Canadian corporation" as defined in subsection 89(1).
3) The Association was formed under Part II of the Companies Act as a non-profit corporation without share capital to hold lands which comprise the XXXXXXXXXX Its only existing member is the Corporation.
4) The Corporation is a corporation incorporated under the XXXXXXXXXX. It is a non-resident of Canada for purposes of the Act. The authorized share capital of the Corporation consists of XXXXXXXXXX common shares with no par value. There are XXXXXXXXXX issued and outstanding common shares. The Trust owns XXXXXXXXXX common shares and Individual B owns XXXXXXXXXX common shares. The directors of the Corporation are currently Individual B and Individual C.
5) The Trust is a trust resident in XXXXXXXXXX and is a non-resident of Canada for purposes of the Act. Its sole trustee is Individual C, also a non-resident of Canada for purposes of the Act.
6) Individual B is a resident of the United States and a non-resident of Canada for purposes of the Act.
7) The Association acquired Land III in XXXXXXXXXX. You advise that the adjusted cost base of Land III is nil and the current fair market value of Land III has been determined by a qualified appraiser to be $XXXXXXXXXX. There is no mortgage on Land III.
8) The Corporation has owned Land I and Land II since XXXXXXXXXX. Land I and Land II, which are subject to the Mortgage Agreement, constitute capital property to the Corporation. You advise that the adjusted cost bases of Land I and Land II are $XXXXXXXXXX and $XXXXXXXXXX, respectively. The aggregate current fair market value of Land I and Land II has been determined by a qualified appraiser to be $XXXXXXXXXX.
9) All the shares of the Corporation were acquired by the Trust and Individual B in XXXXXXXXXX from Individual A, the former shareholder and a resident of XXXXXXXXXX. The acquisition price was $XXXXXXXXXX (US$XXXXXXXXXX). As the shares of the Corporation constituted taxable Canadian property, a certificate was obtained pursuant to subsection 116(2).
10) In XXXXXXXXXX, the Trust and Individual B also acquired the Mortgage Agreement from Individual A for US$XXXXXXXXXX which amount the parties agreed represented the fair market value of the obligations owing by the Corporation under the Mortgage Agreement.
11) The Charity has completed a fundraising campaign to raise the necessary funds to acquire all of the issued shares of the Corporation. XXXXXXXXXX.
12) On XXXXXXXXXX, the Charity entered into two agreements. The first agreement was entered into with the Corporation whereby the Corporation would agree to sell Land I and Land II to the Charity for US$XXXXXXXXXX. The second agreement was entered into with the Association whereby the Association would agree to sell Land III to the Charity for US$XXXXXXXXXX (hereinafter, collectively referred to as "Prior Agreements"). The closing date for the Prior Agreements has been extended by mutual consent to XXXXXXXXXX. If the proposed transactions are completed, the Prior Agreements will be of no further force or effect.
Proposed Transactions
13) In advance of the completion of the proposed transactions, the obligations created under the Mortgage Agreement will be settled and extinguished in full through the issuance of XXXXXXXXXX common shares of the Corporation to each of the Trust and Individual B, which you advise is equal to the fair market value of these obligations.
14) The Charity will contribute US$XXXXXXXXXX to Holdco as the subscription price for newly issued common shares.
15) Holdco will purchase all the issued and outstanding shares of the Corporation for US$XXXXXXXXXX from the Trust and Individual B. Before closing, an application will be made to the Minister pursuant to subsection 116(1).
16) Holdco will appoint a resident of XXXXXXXXXX to act as the sole director of the Corporation.
17) The Corporation will donate Land I to XXXXXXXXXX and Land II to the Charity. The Corporation will request that the Minister issue a certificate pursuant to subsection 116(2) in respect of each donation. The donations will be approved by the director of the Corporation.
18) The Association will donate Land III to XXXXXXXXXX.
19) Following the donation of Land III, the Association will be dissolved in accordance with the provisions of the Companies Act.
20) The Corporation will be liquidated into Holdco in accordance with XXXXXXXXXX law. At the time of its liquidation, the Corporation will hold no assets and have no liabilities.
21) Since the purpose of forming Holdco is to acquire the shares of the Corporation, it will be wound up as soon as practicable after the liquidation of the Corporation. Subsequent to the purchase of the shares of the Corporation, Holdco will not engage in any activities or commercial transactions.
22) The Charity intends to sell Land II in a future transaction. The sale proceeds will be used by the Charity in furtherance of its charitable objectives.
Purpose of the Proposed Transactions
23) XXXXXXXXXX.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, the 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 donation of Land I and Land II donated by the Corporation to XXXXXXXXXX and the Charity, as described in 17 above, will qualify as a charitable gift for the purposes of paragraph 110.1(1)(a) provided an official receipt containing prescribed information is filed as required by subsection 110.1(2).
B. The Charity may issue an official receipt within the meaning of section 3501 of the Income Tax Regulations to the Corporation for a gift described in ruling A above.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 and are binding on the CRA provided that the proposed transactions are completed before XXXXXXXXXX.
Opinion
As stated in paragraph 20 of Information Circular 70-6R5, although the CRA does not provide advance income tax rulings on draft legislation, it will give non-binding technical interpretations. In this regard, provided that the above statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and proposed transactions, and provided that the applicable amendments to the Act as set out in the Notice of Ways and Means Motion tabled by the Minister of Finance on November 9, 2006, are enacted substantially as proposed, it is our opinion that the proposed transactions will not, in and by themselves, for the purposes of determining the eligible amount of the gift by the Corporation under proposed subsection 248(31), result in the conferral of an advantage to the Corporation under proposed subsection 248(32).
Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:
(a) the fair market value or adjusted cost base of any property referred to herein;
(b) whether the Association currently qualifies for the exemption under paragraph 149(1)(l); or
(c) any tax consequences relating to the facts and proposed transactions described herein other than those described in the rulings given above.
Yours truly,
XXXXXXXXXX
Manager
Charitable and Financial Institution Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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