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:
Where the adjusted cost base is the amount designated in respect
of a gift shares under subsection 118(6), for the purposes of:
1) subsection 189(1);
a) what is the amount of debt?
b) would the deemed dividend under subsection 84(3) qualify as
the amount of interest?
2) paragraph 149.1(1)(e), what is the amount of the gift?
Position TAKEN:
1) a) It would be the cost amount to the foundation of the
shares which would be the fair market value of the shares at the
time the foundation acquired them.
b) Yes
2) It would be the amount designated under subsection 118.1(6)
which would be the adjusted cost base of the shares to the donor
at that time.
Reasons FOR POSITION TAKEN:
1) a) paragraphs 189(3)(a) and 69(1)(c)
b) paragraph 189(1)(c)
2) Subsections 118.1(6), 118.1(1) and paragraph 149.1(1)(e)
940710
XXXXXXXXXX B. Kerr
Attention: XXXXXXXXXX
May 9, 1994
Dear Sirs:
Re: Liability for Part V Tax
This is in reply to your letter of September 3, 1993, addressed to the Charities Division which was forwarded to us for reply
wherein you requested our views concerning a gift to a private foundation.
Unless otherwise stated all references to statute are references to the Income Tax Act S.C. 1970-71-72, c.63 as amended consolidated to June 10, 1993 (the "Act").
You have outlined a situation where a donor, who is an individual, gifts capital property consisting of non-voting redeemable/retractable preferred shares of various related corporations to a private foundation. Pursuant to subsection 118.1(6) of the Act, the donor designated an amount equal to the donor's adjusted cost base of the shares. You have asked the following questions:
1. For the purpose of determining any Part V Tax Liability,
(a) Is the dividend requirement 2/3 of the fair interest rate of the cost amount to the individual or would it be based on the fair market value of the shares?
(b) If it is based on fair market value, would the deemed dividend resulting from a share redemption under subsection 84(3) of the Act qualify as "the amount of interest for the year paid on such debt by the taxpayer paid not later than 30 days after
the end of the year" to meet the requirements of paragraph 189(3)(b) of the Act?
2. For the purpose of determining the disbursement quota for the year, would the amount be based on the fair market value of the shares, the retraction value, the value of the liquid assets, or the elected amount at the time of the gifting of the shares?
The situation described in your letter involves actual proposed transactions with identifiable taxpayers. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Taxation. However, we can offer the following general comments.
In order for subsection 118.1(6) of the Act 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. It also deems for the purposes of subsection 118.1(1) that the amount designated will be the fair market value of the gift. Subsection 118.1(6) does not deal with the foundation's cost amount of the shares received. Instead, one
must consider paragraph 69(1)(c) of the Act which provides, inter alia, 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. In the case of capital property, subsection 248(1) defines cost amount to be its adjusted cost base. The term
adjusted cost base is defined in paragraph 54(a), which in the case of a capital property is generally its cost at that time as
adjusted in accordance with section 53. Since there are no section 53 adjustments, the cost amount of the shares to the
foundation would be the fair market value of the shares at the time they are acquired by the foundation.
For the purposes of determining the tax imposed under subsection 189(1) of the Act, by virtue of subsection 189(3), any shares of a corporation that are held as non-qualified investments by a private foundation are deemed to be a debt owing by the corporation to the foundation. By virtue of subparagraph 189(3)(b)(ii) the amount of the debt will be equal to the cost amount of the shares to the foundation at that time. Subsection 189(3) also provides that the reference in paragraph 189(1)(a) to "such prescribed rates as are in effect from time to time during the period" shall be read as "2/3 of such prescribed rates as are in effect from time to time during the period". Accordingly, it is 2/3 of such prescribed rates that are applied to the amount of the debt to determine the interest payable for the purpose of paragraph 189(1)(a).
For the purpose of subsection 189(1), paragraph 189(3)(c) provides that the amount of interest paid in the year is equal to
the aggregate of all amounts each of which is the amount of a dividend received on the share by the foundation in the year.
Therefore, as a result of a redemption of the shares, any dividend deemed to be received by the foundation in the year by
virtue of paragraph 84(3)(b) would qualify to be included as interest paid for the purposes of paragraph 189(1)(b).
The term "Disbursement Quota" is defined in paragraph 149.1(1)(e) of the Act. Subparagraph 149.1(1)(e)(i) refers to 80% of the total of all amounts each of which is the amount of a gift for which the foundation issued a receipt described in subsection 110.1(2) or 118.1(2) in its immediately preceding taxation year.
In our view for this purpose the amount of a gift would be the amount designated under subsection 118.1(6) of the Act since this is deemed to be the fair market value of the gift and as such the amount that the foundation would issue the receipt for. However, gifts of capital received by way of bequest or inheritance are excluded from the disbursement quota by virtue of clause 149.1(1)(e)(i)(A), but included when expended by virtue of the pending amendment if passed in subparagraph 149.1(1)(e)(i.1). It should be noted, however, that the term "Disbursement Quota" has been changed to mean the amount determined by applying an algebraic formula as a result of the 5th supplement to the Revised Statutes of Canada, 1985, introduced as Bill C-15, which came into force on March 1, 1994 and that the pending amendment will be the A.1 component of the formula which is contained in Bill C-27 tabled on May 5, 1994.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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