2007 Ruling 2007-0227171R3 - Split-receipting rules

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 gift results from a sale of property to a charity for less than its fair market value under the draft split-receipting rules.

Position: Question of fact. Yes in this particular case.

Reasons: Under the draft split-receipting rules, a sale of property for partial consideration can qualify as a gift as long as there is donative intent. Based on the facts provided, the amount of the advantage to the vendor will not exceed 80% of the fair market value of the property transferred to the charity. As a result, the transfer will not be precluded from qualifying as a gift under the draft split-receipting rules.

XXXXXXXXXX 								2007-022717

XXXXXXXXXX , 2007

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX
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. XXXXXXXXXX. We also acknowledge the additional information provided in subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX).

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; 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 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.

a) "Charity" means XXXXXXXXXX ;

b) "Closing" means completion of the sale of the Rights by the Individuals to the Charity pursuant to the Sale Agreement;

c) "Committee" means the XXXXXXXXXX as described in 26 below;

d) "CRA" means the Canada Revenue Agency;

e) "Deceased" means the late XXXXXXXXXX;

f) "Deeds of Transfer" means the deed or deeds of transfer, quit-claim deed or deeds or other instrument or instruments pursuant to which the Individuals will sell all of their collective interests in the Rights to the Charity, by way of the sales of the Individual Sale Portions;

g) XXXXXXXXXX;

h) "Endowment" means the endowment fund to be established by the Charity as described more fully in 24 below;

i) "Estate" means the estate of the Deceased;

j) "Gift Amount" means the amount by which the fair market value of the Rights exceeds the Purchase Price for the Rights pursuant to the Letter Agreement;

k) XXXXXXXXXX;

l) XXXXXXXXXX;

m) XXXXXXXXXX;

n) "Individual Gift Amount" means XXXXXXXXXX of the Gift Amount;

o) "Individual Sale Portion" means an undivided XXXXXXXXXX interest in the Rights;

p) "Individuals" means XXXXXXXXXX, collectively;

q) "Initial Payment of Purchase Price" means the payment to be made by the Charity to the Individuals on Closing, which will be at least XXXXXXXXXX of the Purchase Price. The actual amount will depend on the amount received by the Charity from the Purchaser on completion of the sale of the Property under the RFP Proposal;

r) XXXXXXXXXX;

s) "Letter Agreement" means the letter agreement dated XXXXXXXXXX as amended by letters dated XXXXXXXXXX among the Individuals and the Charity, XXXXXXXXXX;

t) "Net Proceeds" means all amounts received by the Charity at the closing or closings of the sale(s) of the Property pursuant to the RFP Process and all amounts in respect of any purchase money mortgages that may be taken back by the Charity from the Purchaser(s) at the closing of such sale(s), less all out-of-pocket expenses including, without limitation, the costs and expenses incurred by the Charity of and for valuation and appraisal, surveying, conveyancing, real estate commissions, collection fees and any necessary approvals, together with its legal costs of and incidental to the transactions contemplated in the Letter Agreement, the sale(s) of the Property and the establishment of the Endowment, but exclusive of any costs incurred to XXXXXXXXXX;

u) "Original Deed" means the deed by which the Deceased conveyed the Property to the Charity in XXXXXXXXXX and created the Rights;

v) "Property" means the real property in the XXXXXXXXXX owned in fee simple determinable by the Charity, subject to the Rights, consisting of approximately XXXXXXXXXX acres;

w) "Purchase Price" means the total amount to be paid by the Charity to the Individuals for all of the Individual Sale Portions, based on a sale of the Property by the Charity pursuant to the RFP Proposal and will be XXXXXXXXXX % of the Net Proceeds received by the Charity on a sale to the Purchaser under the RFP Proposal plus the sum of $XXXXXXXXXX payable by the Charity to the Individuals as a reimbursement of fees;

x) "Purchaser" means the person with whom the Charity enters into an agreement in response to the RFP under which the Purchaser agrees to purchase the Property from the Charity under the RFP Proposal;

y) "Reverter Event" means an event the occurrence of which would cause the interest of the Charity in the Property to terminate and cause the Property to be owned by the Individuals in fee simple as tenants in common. In summary, you advise a Reverter Event will occur if the Property ceases to be used for the purposes described in the Original Deed;

z) "RFP" means the request for proposals to be issued by the Charity, seeking expressions of interest and proposals for the purchase of the Property, including the amount that the Purchaser proposes to pay for the Property and the terms of payment;

aa) "RFP Proposal" means the agreement to be reached between the Charity and the Purchaser for the purchase of the Property, in response to the RFP. The RFP Proposal will, inter alia, determine the amount that the Purchaser is prepared to pay to the Charity to purchase the Property, without regard to the Rights, and the time or times when payments will be made;

bb) "RFP Process" means the process through which the Property is sold under the RFP Proposal;

cc) "Rights" means the rights arising under a possibility of reverter in the Property owned by the Individuals collectively under which, on the occurrence of a Reverter Event, title to the Property would revert in fee simple from the Charity to the Individuals as tenants in common, because the title is held in fee simple determinable;

dd) "Rights Valuation Report" means the report of XXXXXXXXXX expressing an opinion on the fair market value of the Rights;

ee) "Sale Agreement" means the agreement pursuant to which the Individuals will collectively sell the Rights to the Charity.

FACTS

1) The Individuals are resident in Canada for purposes of the Act. They file their tax returns with the XXXXXXXXXX Tax Centre and are serviced by the XXXXXXXXXX Tax Services Office.

2) The Charity is a charitable organization and its charitable registration number is XXXXXXXXXX.

3) Each Individual deals at arm's length with the Charity.

4) In XXXXXXXXXX by the Original Deed, the Deceased conveyed title to the Property to the Charity on terms which require the Charity to use the Property for specific purposes XXXXXXXXXX. If the Charity fails to use the Property for the specified purposes, its ownership would terminate and the Property would revert to the Deceased or her heirs. You advise that as a matter of real property law, the interest of the Charity in the Property is known as fee simple determinable, and on the occurrence of a Reverter Event, that interest would be terminated and the Deceased would become the owner in fee simple of the Property, and all Rights of the Charity would be extinguished. If the Deceased dies before the occurrence of the Reverter Event, the heirs of the Deceased will become the owners in fee simple of the Property as tenants in common when a Reverter Event occurs, and so on from time to time.

5) The Charity is the registered owner of the Property, subject to the Rights.

6) The Deceased died in XXXXXXXXXX, leaving a will.

7) The Individuals are the grandchildren of the Deceased XXXXXXXXXX, and thus are the heirs under the will. As such, they acquired a vested interest in the Rights as tenants in common on the death of their father. Each Individual owns an undivided XXXXXXXXXX interest in the Rights.

8) You advise that the specified purposes for which the Deceased had conveyed the Property to the Charity can no longer be attained as a result of changes in circumstances, XXXXXXXXXX. The Charity wishes to continue to carry out the same objectives as far as possible in accordance with the original wishes of the Deceased and in cooperation with the Individuals.

9) The Charity wishes to be able to dispose of the Property, free of potential uncertainty and possible loss of its interest in the Property upon the occurrence of a Reverter Event as a result of a failure to continue to use the Property for the uses set out in the Original Deed.

10) As a result of lengthy negotiations with respect to the status and effect of the Rights, and with a view to resolving matters, the Individuals and the Charity have entered into the Letter Agreement under which, subject to obtaining satisfactory rulings or opinions from the CRA, each Individual will sell his or her interest in the Rights to the Charity for an amount that is less than its fair market value.

11) XXXXXXXXXX.

12) You advise that in the opinion of counsel:

i) the Rights are an interest in real property and are of a hybrid nature, since in one sense they are vested because they belong to the heirs of the person who created the Rights and reserved them out of fee simple, and in another sense they are contingent in that acquisition of the fee simple in the Property by the Individuals and the termination of the interest of the Charity may or may not occur; and

ii) the Rights collectively and the Individual Sale Portions are property that is capable of transfer and assignment by the Individuals, either for consideration or by way of gift.

13) You further advise that when the Charity acquires the Rights, they will merge with the fee simple and be extinguished by operation of law, with the result that the Charity will thereafter own the Property in fee simple, and the Individuals will have no further Rights in respect of the Property, but will have the right to be paid the Purchase Price under the Sale Agreement. In summary, on Closing, all of the Rights will be extinguished, since they will have been acquired by the Charity and will have merged with the interest currently owned by the Charity.

14) The Rights Valuation Report estimates that the fair market value of the Rights is XXXXXXXXXX% of the fair market value of the Property.

15) The Rights Valuation Report does not allocate the respective interests of the Individuals among them. The Individuals and the Charity have agreed that the value of the interest of each Individual in the Rights is equal to XXXXXXXXXX of the fair market value of the Rights.

PROPOSED TRANSACTIONS

16) Pursuant to the Sale Agreement, the Individuals will sell the Rights to the Charity. Under the Letter Agreement, the Purchase Price for the Rights will be XXXXXXXXXX% of the fair market value of the Rights or XXXXXXXXXX% of the fair market value of the Property based on the Rights Valuation Report as referred to in 14 above.

17) Since the Property will be sold by the Charity to the Purchaser immediately after the Closing, the Individuals and the Charity have agreed to use the Net Proceeds to be received by the Charity on the completion of the sale of the Property under the RFP Proposal as the fair market value of the Property for purposes of determining the Purchase Price. This is reflected in the Letter Agreement which provides that the fair market value of the Property is equal to the Net Proceeds receivable under the sale pursuant to the RFP Proposal. The Letter Agreement then states that the Purchase Price will be XXXXXXXXXX % of the Net Proceeds plus the sum of $XXXXXXXXXX as reimbursement of the Individuals' legal costs of the transactions.

18) The Initial Payment of Purchase Price will be paid by the Charity on Closing, as to XXXXXXXXXX to each Individual. The Charity will pay the balance of the Purchase Price to the Individuals after a sale of the Property, when payments are received by it from the Purchaser. The Charity will also pay to the Individuals at the same time as and incremental to the amount of the Initial Payment of Purchase Price the sum of $XXXXXXXXXX as noted in 17 above.

19) The parties contemplate that the Property will be sold by the Charity through the RFP Proposal. To reflect the fact that the Individuals will have received the Initial Payment of Purchase Price on Closing, the Charity will retain XXXXXXXXXX of the Net Proceeds ("Retained Amount") from the sale of the Property before any further payments are made to the Individuals after the sale. The excess of Net Proceeds over the Retained Amount will be divided as to XXXXXXXXXX % in favour of the Individuals collectively in equal XXXXXXXXXX shares and as to the balance in favour of the Charity. Such payments will be made to the Individuals as those proceeds are received by the Charity from the sale or sales of the Property.

20) The Individuals will deliver the Deeds of Transfer to the Charity to convey the Rights pursuant to the Sale Agreement.

21) For greater certainty, the sole surviving trustee of the Estate will also execute a quit-claim conveyance in favour of the Charity. It is understood there are no residual Rights in favour of the Estate and only the Individuals have any vested interest in the Rights for purposes of these transactions.

22) The Charity will issue an official receipt to each Individual in accordance with the Act and the Regulations for an amount equal to the Individual Gift Amount.

23) XXXXXXXXXX.

24) XXXXXXXXXX.

25) XXXXXXXXXX.

26) The Charity will establish the Committee for the XXXXXXXXXX. The Committee will be subject to the Charity's existing policy on the role of advisory bodies. Up to two descendants of the Deceased will be members of the Committee in perpetuity or so long as there are descendants available and willing to act. They will contribute their time and be paid no fees for their involvement. The Committee will meet at least annually to receive the report on the management of the Endowment and the expenditure of the income therefrom. The Committee may have such other advisory functions as prescribed by the Charity. You advise the descendants will not be in a position to control the Committee.

27) None of XXXXXXXXXX will participate directly or indirectly, except as provided for in this letter, in the operation, day to day or otherwise, of the Charity or the XXXXXXXXXX.

28) The Gift Amount will be irrevocable in that the Individuals, any related persons, and their assigns will not be entitled to the return of the amounts donated to the Charity.

PURPOSE OF THE PROPOSED TRANSACTIONS

29) The purposes of the proposed transactions are:

i) to reach an orderly resolution of the differences between the Individuals, on the one hand, and the Charity, on the other hand, with respect to the status of the Rights and their effect on the ownership of the Property;

ii) to permit the Charity to proceed with the sale of the Property, without further regard to the uncertainty that arises under the Rights and to establish the Endowment for the purposes, and on the terms, described in the Letter Agreement; and

iii) to allow the Individuals to receive partial consideration for a sale of the Rights.

30) The transactions are designed to give the Individuals a combination of proceeds from a sale of the Rights and tax credits for donations of the Gift Amount.

RULING 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:

Each Individual will have a capital gain from the disposition of the Individual Sales Portion to the Charity of an amount equal to the excess of the fair market value of the Individual Sale Portion over the adjusted cost base, if any, to the Individual of the Individual Sale Portion for the purposes of paragraph 39(1)(a).

The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 and is binding on the CRA provided that the proposed transactions are completed before XXXXXXXXXX.

OPINIONS

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 purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, if the applicable amendments to the Act as set out in Bill C-33 which received Second Reading in the House of Commons on May 14, 2007 are enacted in substantially the same form as proposed, it is our opinion that:

A. The excess of the fair market value of an Individual Sale Portion over the total amount of the advantage, as defined in proposed subsection 248(32), that the Individual receives, obtains or enjoys will, provided that the total amount of such advantage does not exceed 80% of the fair market value of the Individual Sale Portion, be the eligible amount of a gift for purposes of proposed subsection 248(31) and the Individual may include such eligible amount in determining his or her total charitable gifts, for purposes of subsection 118.1(1) for the year in which the donation occurs if an official receipt containing prescribed information is filed as required by subsection 118.1(2).

B. Provided that there is no prospective economic benefit associated with the naming rights referred to in 23 and 25 above, the amount of the advantage of such naming rights will be nil for purposes of proposed subsection 248(32).

COMMENTS

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; or

b) any tax consequences relating to the facts and proposed transactions described herein other than those described in the ruling and opinions given above.

We trust that our comments will be of assistance to you.

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