8 January 1993 Administrative Letter 9235756 F - Charitable Donation Gift

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.

January 8, 1993

XXXXXXXXXX

We are writing in response to your memorandum of November 27, 1992 wherein you asked for our written opinion of a proposal for registration of the XXXXXXXXXX which has been settled by members of the XXXXXXXXXX

The Facts

XXXXXXXXXX

XXXXXXXXXX

Based on the above, you have requested our opinion on whether there will be a gift of the capital structures and whether the value of the gift would be equal to the fair market value of the structures or some other value. You have asked if we have any concerns regarding situations where title to the property would be held in trust by the XXXXXXXXXX themselves. And you have asked for our comments on any other matter which may be of concern.

Our Comments

The following comments result from our review of the incoming file:

1)     The implication in case law is that contract ownership of buildings separate from land may be possible. As stated in Rudnikoff v MNR 75 DTC 5008 (FCA) at 5009:

     "...in my view, while the general rule, both in the common law provinces and in the Province of Quèbec is that a substantial building becomes a part of the land and belongs to the owner of the land, this situation may be changed, by contract or otherwise, so that ownership of the building is separate from ownership of the land and the building would not be a part of the subject matter of the lease. Such a result would, however, follow only as a result of clear language and, in my view, in this case, the terms of the emphyteutic lease are not such as to produce such a result."

And from Plan A Leasing v MNR 76 DTC 6159 (FCTD) at 6164:

     "In law, the title of the lands and the title to the buildings on such lands can be conveyed separately when parties have made a special contract to do so. When parties do so by property conveyances, they may, as was said in Davy v Lewis 1860 U.C.Q.B. 21 at page 30, define and make a law for themselves in respect of such lands and building. In other words, the usual rule of law that the building is part of the freehold can be abrogated by a contract of parties. They can completely sever the right title and interest in the freehold of the lands on which the building sits, even though the building continues to be annexed to such lands....The only other question that arises is whether or not the subject documentation in law carried out the intention of the parties in this case."

However, some doubt has been cast on this view in MNR v Mount Robson Motor Inn Limited 81 DTC 5188 (FCA) at 5190:

     "When chattels are physically attached to land they may either retain their identity and remain chattels or become part of the land, in which case they are called fixtures. As fixtures are really part of the land, once attached to the land, they become property of the owner of the land; and this is true, as long as the articles remain attached to the land, whether or not the person who affixed them to the land has retained power to sever and remove them.

     It may be difficult, in certain cases, to determine whether or not a chattel has been so attached to the land as to become a chattel. However, it is clear, I think, that ordinary buildings and an asphalt pavement like the improvements here in question are normally considered to be fixtures. When such improvements are constructed by a tenant, they become the property of the owner of the land. In order for the buildings and pavement here in question to have retained their identity as chattels and remained the property of the lessee, if it were at all possible, a clear indication of that intention should have been found in the lease." (emphasis added)

From the above case law, if the separation of the buildings from the land were at all possible, it must be clearly done and reflected in all documentation including Land Registry. We fully support the following statement reflected in a Memo For File (26/10/92) by D. Scharf: "In considering registration, we would insist that receipts could not be issued until approval was given to the transfer of title to the property by the province. We would need evidence of the transfer once approved."

2)     If the arrangement does result in a gift of the buildings separate from the land, in our view the value of the gift of the buildings may form part of the `Disbursement quota' of the Trust unless, as provided in clause 149.1(1)(e)(i)(B), the buildings are gifted with a direction to the effect that they, or property substituted therefor, be held for a period of not less than 10 years.

3)     Should it be determined that a gift has been made, subsection 118.1(6) provides that where the fair market value of the capital property is in excess of its adjusted cost base, the XXXXXXXXXX may value the gift at any amount between the fair market value and its adjusted cost base. This value will also be the amount of the proceeds of disposition of the property. In this way, the XXXXXXXXXX may determine the amount of recapture or capital gain which results from the gift. IT-288R Gifts of Capital Properties to a Charity and Others reflects the Department's views on the gifting of capital property. The comments are still applicable though the provisions were changed in 1988.

Determination of the fair market value of the buildings separate from the underlying land will be a question of fact. Though this is a query for Valuations, it is likely that the fair market value of the buildings will be based on a determination of what an arm's length person would pay for the right to remove the buildings, rather than what the building would be worth sitting on the land to which it belonged.

4)     XXXXXXXXXX

However, documentation, including registration of appropriate documents in the relevant Land Titles Offices, would need to reflect the change in beneficial ownership of the buildings.

5)     Paragraph 2 of IT-226R, with respect to a `Gift to a Charity of a Residual Interest in Real Property or an Equitable Interest in a Trust', states that:

     "Where the property donated consists of...an equitable interest in a trust, the Department will consider a gift to have been made if all of the requirements listed below are met

(a)     There must be a transfer of property voluntarily given with no expectation of right, privilege, material benefit or advantage to the donor or a person designated by the donor...

(d)     It must be evident that the recipient organization will eventually receive full ownership and possession of the property transferred."

It appears that requirements (a) and (d) above have not been satisfied. With respect to paragraph (a), we understand that the XXXXXXXXXX

These concerns must be adequately resolved before a DO could determine whether a gift has been made.

We trust that these comments will be of assistance.

E. Wheeler for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch