13 February 1996 Internal T.I. 9515676 - GIFT TO COMMUNAL ORGANIZATION - XXXXXXXXXX

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 a donation of buildings by a XXXXXXXXXX congregation to a XXXXXXXXXX charitable trust is a gift for purposes of the Act.

Position:

It is arguable that it is not a gift.

Reasons:

The only significant element of benefaction on the part of the donor is to benefit the beneficiaries of the trust by way of tax relief (i.e. by obtaining a tax credit), the donor and persons related to the donor (the beneficiaries of the trust) have received an advantage of a material character by way of continued use of the buildings, the donation did not proceed from a detached and disinterested generosity and the property may revert back to the congregation.

							February 13, 1996

	Charities Division			HEADQUARTERS
R. A. Davis				C. Chouinard
	Director					957-8953

							7-951567

Gift of Buildings to XXXXXXXXXX Charitable Trust

This is in response to your memorandum of June 12, 1995, wherein you requested our comments regarding the tax status of a gift of buildings by a XXXXXXXXXX congregation (the "Congregation") to a XXXXXXXXXX charitable trust. More specifically, you have asked whether the definitions in section 54 of the Income Tax Act (the "Act") are relevant for purposes of determining whether a gift has been made and whether official donation receipts can be issued to the Congregation members.

We understand the facts to be as follows: a XXXXXXXXXX corporation (the "Corporation"), which is deemed to be a trustee of a deemed inter vivos trust pursuant to subsection 143(1) of the Act, has donated buildings to a charitable trust, with a concurrent 10-year lease to the charitable trust of the lands on which the buildings are located. After the transfer, the land and buildings continue to benefit the Congregation to the same extent as they did before the donation was made. At the end of the 10-year lease, the land and buildings will revert back to the Congregation for fair market value.

Our Comments

As indicated in section 143 of the Act, an inter vivos trust is deemed to exist if a congregation carries on a business and its members live communally and do not own property in their own right as a matter of religious conviction. The property of the congregation and the property of all business agencies of the congregation are deemed to be the property of the trust. In addition, the members of the congregation are deemed to be beneficiaries under the trust.

The question whether a deemed trust under the Act is considered to be a trust for all purposes of the Act by virtue of the deeming provision has been considered with respect to segregated funds, as defined in subsection 138.1⁽¹⁾ of the Act.

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Since a deemed trust is created without restriction by section 143 of the Act and since this deemed trust has all of the above-mentioned elements of a common law trust, in our view, it should be considered to be a trust for all purposes of the Act. In keeping with trust law principles, the trustee (the corporation) would be considered to be the legal owner of the trust property (i.e., the church, school and other buildings), while the members of the Congregation (the beneficiaries) would have title to the right of enjoyment in the property, that is, the beneficial title. Accordingly, in our view, beneficial ownership of the land and buildings would belong to the members of the Congregation.

As regards the charitable trust, we assume it was established to administer charitable programs, such as the operation and the maintenance of church and school facilities, for the benefit of the members of the Congregation. Since it appears that the main, if not the only, beneficiaries of the charitable trust's activities are the members of the Congregation, we question whether the charity meets the "public benefit" test.

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In light of these comments, it is not clear to us on what basis the charity obtained registration, however, since you have not raised this issue, we will not consider it further.

Given that the beneficiaries of the deemed inter vivos trust and the beneficiaries of the charitable trust appear to be the same group of persons, namely, the members of the Congregation, the Business Audit Section of the Edmonton Tax Services office has questioned the validity of the gift from the Corporation to the charitable trust and inquired whether a transfer of the beneficial ownership of the property donated was required in order to validate the gift.

As regards beneficial title, as indicated in paragraph 6 of Interpretation Bulletin IT-297R2, the fair market value of a gift in kind as of the date of the donation (the date on which beneficial ownership is transferred from the donor to the donee) must be determined before an amount can be recorded on a receipt for tax purposes. It would therefore appear that a donation of a gift in kind will be recognized at a point in time when the beneficial ownership of the gift in kind is transferred from the donor to the donee. This raises the question of whether transfer of beneficial ownership of a property is required in order that a gift be recognized.

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In this respect, we refer you to the case of Leary v. F.C. of T. 80 ATC 4438 where the Court quoted (at page 4440) the following definition of gift:

"The word "gift" has two distinct meanings in English law: it is used by conveyancers to describe certain assurances of real property, but it usually means a transference of the beneficial interest in property by one person to another without any consideration from that other."⁽²⁾

In considering how to interpret the word "gift" in the context of tax legislation, the Court expressed the following opinion (at p. 4450):

"The ordinary notion of gift and "gift" in its technical meaning have common features: a transfer of a beneficial interest in property by way of benefaction, and an absence of a pecuniary or proprietary benefit passing to the transferor by way of return. But the relevant circumstances in which these indicia may be found are more narrowly confined when the enquiry is as to a gift in the technical sense than when the enquiry is as to a gift according to ordinary notions. The former enquiry is narrower in scope, for it is more confined in its purpose. Its purpose is to ascertain whether a beneficial interest in property has been transferred by a mode which falls within the classification of gift. The intention of the transferor and transferee as to the ownership of the beneficial interest and the form of its transfer exhaust the matters for investigation as to the divesting and investing of the interest, and the absence of consideration passing from the transferee to the transferor serves to distinguish a gift from other modes of transferring property."

In his article entitled The Meaning of Gift in Gift Tax Law,⁽³⁾ E.J. Mockler states that a trust and a gift are two separate and distinct legal concepts. Although the author does not expand on the differences between a trust and a gift, he quotes (at p. 378) as follows from the case of Richards v. Debridge (1874), 18 Eq. 11:

"These two methods of transferring such property are, it should be added, wholly distinct from one another .... There is, however, one feature common to the two methods of transfer, namely, that in both cases the donor or grantor must have by complete gift or transfer in the one case, or by acts which admit of no other interpretation in the other case, parted with the beneficial interest in the subject matter of gift."

In our view, the beneficiaries of the deemed trust could be considered to have parted with their beneficial interests in the property donated only if their rights in respect of the property after the donation are different from the rights they had in respect of this property prior to the donation. If they have the same rights in respect of the property that they had as beneficial owners (i.e., prior to the donation), it is doubtful that they would be considered to have transferred their beneficial interests in the property. This question is not, however, easily solved in the context of a deemed trust and deemed beneficiaries, since it is not clear what rights the beneficiaries had in respect of the communal property donated and what rights, if any, they have in respect of this property now that it has been donated to their charity.

As you indicated, paragraph (e) of the definition of "disposition" in section 54 of the Act provides that a disposition of property does not include a change in legal ownership of property not accompanied by a corresponding change in the beneficial ownership of this property. Although it appears from our comments above that a similar rule exists in respect of gifts, nevertheless, in our view, paragraph (e) of the definition of "disposition" cannot be resorted to in determining whether a gift has been made, since section 54 of the Act only applies for the purposes of Subdivision c of Division B of the Act, that is, for purposes of calculating capital gains. Furthermore, in our opinion, the validity of a gift should be determined in light of common law principles. Given the definitions quoted and comments made in the cases mentioned above, it appears that in order for a gift to be recognized under the common law, the beneficial ownership of the property donated must be transferred from the donor to the donee.⁽⁴⁾ However, as we indicated above, since this case involves a deemed trust, it is difficult to establish whether the beneficial ownership of the property was transferred from the Corporation to the charitable trust.

With respect to the validity of the gift, a donation will meet the common law definition of a gift if it is a voluntary transfer of real property from a donor (in this case, the inter vivos trust), who freely disposes of its property, to a donee (the charitable trust), who receives the property given, the transaction does not result directly or indirectly in a right, privilege, material benefit or advantage to the donor or to a person designated by the donor, there are no legal obligations on the donor to donate the property, the donation is made without conditions, from detached and disinterested generosity, out of affection, respect, or charity or like impulses, and not from the constraining forces of any moral or legal duty and the donee has an unfettered right to use the property as they wish. Based on the information provided, it would appear that the donation in question does not meet the above-mentioned criteria, in that it could be considered not to have been made from "detached and disinterested generosity" and not to meet the requirement that there not be a "right, privilege, material benefit or advantage". Given that the ultimate beneficiaries of the donated property are the beneficial owners of the property, it is difficult to conceive that the donation was made from "detached and disinterested generosity" and that it does not lead to "a material benefit or advantage". In addition, since the property may revert back to the Congregation, the charitable trust could not, in our view, ever be considered to be the absolute owner of the property donated. At most, it could be considered to have received a gift of an interest in the property. Accordingly, in our view, the Department may have a respectable argument that the donation of the communal buildings is not a gift because the only significant element of benefaction on the part of the donor (the trust) is to benefit the beneficiaries of the trust by way of tax relief (i.e. by obtaining a tax credit), the donor and persons related to the donor (the beneficiaries of the trust) have received an advantage of a material character by way of continued use of the buildings, the donation did not proceed from a detached and disinterested generosity and the property may revert back to the Congregation.

Bryan W. Dath
Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

endnotes

¹ See Gilmour v. Coats, (1949) AC 426 (H.L.), where the Court held that the purposes of a Carmelite convent who engaged mainly in worship, prayers, meditation and other activities for the benefit of the Carmelites, were not charitable because of a lack of a sufficient element of public benefit.

² Collector of Imposts (Vic.) v. Peers (1921) 29 C.L.R. 115, at p. 121.

³ (1963), 41 Can. Bar Rev. 385.

⁴ In a letter dated March 26, 1982 from
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the Corporate Rulings Division was asked whether the transfer of assets from a communal organization to a corporation or from one corporation to another would constitute a taxable event that might give rise to capital gains or recapture. In response thereto, the Department indicated that "all the property of the congregation and the property of all corporations, trusts or persons of the congregation that carry on business for purposes that include supporting or sustaining the members of the congregation or the members of any other congregation are deemed to be the property of an inter vivos trust. Accordingly, transfers of property from the congregation to a corporation of that congregation or transfers between the corporations of the congregation are transfers of property within the same inter vivos trust and are not subject to the application of subsection 69(1). These transfers do not ordinarily constitute taxable events." This line of reasoning would not hold in the case at hand, since the buildings are transferred between a XXXXXXXXXX Corporation and a charitable trust and, according to the definition of "religious organization" in subsection 143(4) of the Act, a registered charity does not form part of the congregation and, therefore, of the inter vivos trust.