20 January 1998 External T.I. E9729915 - SALE OF SHARES TO A CHARITY

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.

Principal Issues:

Whether or not an individual can sell a capital property to a registered charity for an amount below the fair market value of the property.

Position:

Yes.

Reasons:

There is nothing to prevent a taxpayer from disposing property in whatever way he chooses. There is a possible adverse tax consequence if the purchaser does not deal at arm's length with the taxpayer.

972991
XXXXXXXXXX J.E. Grisé

January 20, 1998

Dear Sir:

Re: Sale of Shares

This is in reply to your letter of October 30, 1997 requesting a ruling on the proposed sale of XXXXXXXXXX for the adjusted cost base of the shares in the corporation.

Your letter sets out various facts, information and proposed transactions but does not indicate what specific rulings are being requested. Paragraph 16(g) of the attached Information Circular 70-6R3, Advance Income Tax Rulings, requires, inter alia, a description of the income tax concern that is the cause of the request for the ruling. Accordingly, we are not in a position to provide you with an advance income tax ruling. However, we will provide you with some general comments which may be of assistance to you.

An individual may sell his or her property to a registered charity for an amount less than the fair market value of such property. Where the individual and the registered charity are dealing with each other at arm's length, the individual's proceeds of disposition for the property will be equal to the selling price. If the individual and the registered charity are not dealing at arm's length, the individual is deemed to have received proceeds of disposition for the property equal to the fair market value of the property. A copy of Interpretation Bulletin IT-419R, Meaning of Arm's Length, is attached for your convenience

Where the property being sold is a capital property to the individual, a capital gain or loss on the disposition will be determined by the difference between the proceeds of disposition of the property and the adjusted cost base of the property with any appropriate adjustment for expenses or outlays relating to the disposition.

The registered charity is not entitled to give a donation receipt for any property it purchases. However, a donation receipt can be given by the registered charity when a donation is received from the individual in order to reduce the note payable issued by the registered charity upon the purchase of the property from the individual. Similarly, a donation receipt can be issued where the individual forgives a portion of the note payable by the registered charity.

We are also enclosing a copy of Interpretation Bulletin IT-288R2, Gifts of Capital Properties to a Charity and Others, for your information. You will note from paragraph 2 of the bulletin that subsection 118.1(6) of the Income Tax Act permits an individual who makes a qualifying gift of capital property to designate a value for the gift. The designated amount cannot be more than the fair market value of the property at the time the gift is made and it cannot be less than the adjusted cost base of the property. This provision could allow an individual to make a gift of capital property without attracting a capital gain on the disposition. Such a gift made to a registered charity could then be used in the year or in the next five years to determine the individual's non-refundable tax credit in respect of donations. This procedure may achieve the same results as selling a capital property to a registered charity for its adjusted cost base.

We hope that our comments are of assistance but since they do not constitute an advance income tax ruling, are not binding on the Department with respect to any particular transaction.

Yours truly,

John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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