28 January 1994 External T.I. 9401445 - PRIVATE FOUNDATIONS

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

XXXXXXXXXX 940144

Attention: XXXXXXXXXX

January 28, 1994

Dear Sirs:

Re: Private Foundations

This is in reply to your letter of September 2, 1993 addressed to the Charities Division of Revenue Canada in which you requested our views on two questions concerning private foundations.

1.In the first scenario, a donor, who is an individual, gifts capital property consisting of shares of the capital stock of a corporation to a registered charity that is a private foundation. Pursuant to the provisions of 118.1(6) of the Income Tax Act (the "Act"), the donor designates an amount which is less than the fair market value of the shares but no less than his adjusted cost base of the shares. You queried whether the foundation's cost amount for purposes of subsection 189(3) of the Act would be the fair market value of the shares or the amount designated under subsection 118.1(6).

2.In the second scenario, a donor gifts, to a private foundation, voting preferred shares of a corporation which are convertible into voting common shares. By virtue of this share ownership, the foundation will own more than 50% of the corporation's issued share capital, having full voting rights under all circumstances. You expressed the view that the foundation would, by virtue of subsection 149.1(12) of the Act, be deemed not to have acquired control of the corporation since it has not given any consideration for the shares. Your concern is whether a subsequent conversion of the preferred shares into common shares would result in the foundation acquiring control of the corporation and, if so, whether the registration of the private foundation would therefore be revoked.

Our Comments

It appears that the questions you raised may relate to contemplated transactions for specific taxpayers. Where proposed transactions are involved, the Department does not provide binding opinions other than by way of advance income tax rulings. Although we are unable to provide any binding opinion in respect of the specific scenarios you have described, we have set out below some comments of a general nature.

1.In order for subsection 118.1(6) to apply, there are several requirements stated in that subsection which must be met. Where it applies, subsection 118.1(6) deems the individual's proceeds of disposition of the shares to be equal to the amount designated. Also, subsection 118.1(6) deems, for purposes of subsection 118.1(6) only, the fair market value of the gift of shares to be equal to the amount designated. Subsection 118.1(6) does not deal with the foundation's cost amount of the shares received. Instead, one must consider subsection 69(1). Paragraph 69(1)(c) states that where a taxpayer has acquired property by way of gift, he shall be deemed to have acquired the property at its fair market value.

Subparagraph 189(6)(a)(ii) of the Act refers to the cost amount to the foundation of the shares. The cost amount to a taxpayer of capital property other than depreciable property is defined in subsection 248(1) to be his adjusted cost base, and adjusted cost base of non-depreciable property is defined in subparagraph 54(a)(ii) to be its cost (subject to section 53 adjustments). Since the foundation's cost is, as stated above, the fair market value of the shares at the time they are acquired by the foundation, the cost amount to the foundation of the shares for purposes of subsection 189(3) is their fair market value.

2.For the purposes of section 149.1, paragraph 149.1(12)(a) provides that a corporation is controlled by a charitable foundation if more than 50% of the corporation's issued share capital (having full voting rights under all circumstances) is owned by the foundation, or by the foundation and persons with whom the foundation does not deal at arm's length. However, for purposes of paragraphs 149.1(3)(c) and (4)(c), which provisions concern the acquisition of control of a corporation by a foundation after May of 1950, paragraph 149.1(12)(a) states that a charitable foundation is deemed not to have acquired control of a corporation if it has not acquired for consideration more than 5% of the issued shares of any class of the capital stock of the corporation. Thus, where the foundation receives all of its shares of a corporation by way of gift, the foundation will be deemed (for the limited purposes stated herein) not to have acquired control of the corporation. In the hypothetical scenario you presented, the foundation would be deemed not to have acquired control of the corporation on the acquisition of the preferred shares since the preferred shares are acquired by gift.

However, on the acquisition of the common shares by virtue of the conversion of the preferred shares to common shares, the foundation would be providing the preferred shares as consideration. Since the foundation would be deemed not to have acquired control of the corporation on its acquisition of the preferred shares, and yet it will control the corporation through its ownership of common shares, it is reasonable to conclude that the foundation will acquire control of the corporation on its acquisition of common shares.

According to the Charities Division, the revocation of a foundation's registration is at the Minister's discretion. Thus, the acquisition of control by a foundation of a corporation would not automatically result in the foundation's registration being revoked; however, it could very well lead to that result following consideration of the relevant facts. This would entail a review of the facts of the specific case and thus no general statement can be made concerning the hypothetical scenario.

We trust that our comments are of assistance.

Yours truly,

A.M. Brake
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch