21 October 2009 External T.I. 2009-0315531E5 - Cash gifts from a corporation

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: Will cash gifts from a corporation give rise to a tax liability?

Position: Yes, the amounts will be added to the shareholder's income.

Reasons: Benefits conferred on a shareholder will be included in income per subsection 15(1). Benefits conferred on others may be included in the shareholder's income per subsection 56(2).

								2009-031553
XXXXXXXXXX 							Rita Ferguson
								519-645-5261
October 21, 2009

Dear XXXXXXXXXX :

Re: Cash gifts from a corporation

This is in response to your letter of February 6, 2009 inquiring about the tax implications of cash gifts paid by a corporation.

You indicate that you are the sole shareholder and sole employee of a corporation. You have asked whether there are any tax liabilities for an individual (e.g., relative or friend) who may receive a cash gift from your corporation, where such an individual is not an employee or shareholder of the corporation, and where the cash payment will not be deducted for tax purposes by the corporation. We have assumed the cash gift is not being made to the individual in contemplation of that person becoming a shareholder of the corporation. You have also asked if there would be any tax implications if the individual were, in turn, to give the cash gift back to yourself.

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 a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca.

Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA. We do not have sufficient details to provide answers covering all possible scenarios and we have restricted our comments to the application of subsections 15(1) and 56(2) of the Income Tax Act (the "Act"). Depending on the actual facts of the case, other provisions may be applicable.

In general terms and subject to certain exceptions, subsection 15(1) of the Act requires that the amount or value of a benefit conferred on a shareholder, or a person in contemplation of his or her becoming a shareholder, by a corporation in a taxation year is to be included in the shareholder's income for the year. A benefit will normally not be considered to have been conferred on a shareholder where the transaction is a bona fide business transaction such as, for example, a payment made to the shareholder in his or her capacity as an employee for services provided to the corporation.

However, a cash gift paid from a corporation to an individual in his or her capacity as a shareholder, where no consideration is provided by the shareholder in return, would be a benefit to which subsection 15(1) of the Act would apply. The amount of the cash gift would be included in the shareholder's income and the corporation would not be allowed to deduct the amount from income.

Subsection 56(2) of the Act deals with a benefit conferred on a person for the benefit of a taxpayer or a benefit that a taxpayer desired to have conferred on another person. Therefore, if a cash gift is paid from a corporation to some other person, at the direction of the shareholder, subsection 56(2) of the Act would apply. In the situation you describe, the amount of the cash gift would be included in the shareholder's income in the same manner as if it had been paid directly to the shareholder and the corporation would not be allowed to deduct the amount from income. This would be the case regardless of whether that other person in turn paid any amount back to the shareholder.

We also note that where a tax filer knowingly or under circumstances amounting to gross negligence has failed to comply with the duties and obligations imposed by or under the Act with the result that the tax payable was reported to be less that it should have been, subsection 163(2) provides for a penalty of the greater of $100 or 50% of the amount of tax understated.

Additional information about the application of subsection 15(1) is available in Interpretation Bulletin IT-432R2 "Benefits Conferred on Shareholders". Additional information about the application of subsection 56(2) is available in Interpretation Bulletin IT-335R2 "Indirect Payments".

We trust the above comments are of assistance.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch