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 non-eligible donee could be liable for revocation tax.
Position: Yes.
Reasons: The non-eligible donee appropriated property from the charity 120 days before the end of the charity's deemed year-end. Under subsection 188(2), this makes the donee jointly and severally with the charity for the charity's revocation tax.
September 27, 2011
Charities Directorate HEADQUARTERS
Income Tax Rulings
Directorate
Attention: Danie Huppé-Cranford Lindsay Frank
Director, Compliance Division (613) 948-2227
2011-040708
Third Party Liability for Revocation Tax
This is in reply to a request from Kathryn Taylor for a technical interpretation on the liability of third parties for revocation tax.
At issue is the case of a charity that made a gift of $1,100 to a non-eligible donee. The gift was made after the charity was issued with a notice of intention to revoke its registration. The non-eligible donee was asked to return the gift, but has been reluctant to do so. As a result, the charity is unable to transfer all of its assets to an eligible donee, and will be liable for revocation tax at least to the extent of the gift. However, the charity will have no assets to defray tax payable, which is yet to be assessed.
Pursuant to subsection 188(1.1) of the Income Tax Act (the "Act"), the Minister may impose, under subsection 188(1), revocation tax after issuing to a registered charity a notice of intention to revoke its registration, which, when issued, creates a deemed year-end for the charity. In accordance with subsection 189(6.1), the charity is required to file a return for that year and pay the tax no later than one year from the deemed year-end. If the charity is unable to pay the amount assessed, the non-eligible donee may be held liable under either subsection 188(2) or subsection 160(2).
Subsection 188(2) makes a person, who appropriates property from a deregistered charity, jointly and severally or solidarily liable with the charity for revocation tax. For subsection 188(2) to apply, the appropriation must have been made 120 days before the end of the charity's deemed year-end. In addition, the fair market value of the property appropriated must exceed the consideration given, and the charity must have been liable under the Act.
It should be noted that under subsection 152(3) liability for tax is not affected because an assessment has not been issued. In this regard, it was held in The Queen v. Simard-Beaudry Inc., 71 D.T.C. 5511 (F.C.T.D.), that an assessment does not create the liability; at most it is a confirmation of its existence. It follows that a third party could be held liable for revocation tax before a charity has been assessed for such an amount. Accordingly, provided that the prerequisites of subsection 188(2) are met, an assessment may be issued to the non-eligible donee.
A gift constitutes a transfer of property within the meaning of section 160, see McVey v. The Queen, [1996] 2 C.T.C. 2157, 96 D.T.C. 1225 (T.C.C.). In this respect, a person, who receives property from a transferor, in this case the charity, may be jointly and severally liable for the charity's liability pursuant to paragraph 160(1)(e) of the Act. For this provision to apply, the charity must be liable to pay an amount under the Act in respect of the year of the transfer or any preceding year. In addition, the property must have been transferred for less than fair market value to a person with whom the charity was not dealing at arm's length.
In the instant case, there is no evidence that the charity and the non-eligible donee were not dealing at arm's length; consequently, section 160 would not apply. This finding could be revisited should it be later determined that the parties were not dealing at arm's length.
Should you have any questions or require additional information, please do not hesitate to contact Lindsay Frank at the number provided at the outset of this memorandum.
B.J. Skulski
Manager
Insolvency and Administrative Law Section
International and Trusts Division
Income Tax Rulings Directorate
c.c. Kathryn Taylor, Manager
Filing Enforcement Section
Compliance Division
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