9 July 1993 External T.I. 9306605 F - Whether Corporation Can Make Donation Rather Than Estate

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.

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Attention:  XXXXXXXXXX

Dear Sir:

RE:  Charitable Donations Made By Will

This is in response to your letter of February 23, 1993, concerning the tax implications of having certain donations made by a corporation in which the deceased owned shares at the time of his death rather than by the deceased individual's estate acting in accordance with the deceased's will. In particular, you question whether any section 15 benefit might befall the surviving spouse in her capacity as shareholder should the corporation make the donations.

Your letter seems to involve an actual proposed transaction involving a particular taxpayer. Where that is the case, the proposal should be the subject of an advance income tax ruling requested in accordance the procedure set out in the Department's Information Circular 70-6R2. We offer, however, the following general comments.

Section 15 of the Income Tax Act imposes a benefit in the amount, or value, thereof when it is conferred on a shareholder, by a corporation otherwise than by certain prescribed methods, including the redemption of shares, the issuance of dividends and others, none of which would seem to apply to the circumstances you describe.

A benefit in the context of this section has been held to exist in circumstances where a corporation pays the liabilities of a shareholder: see Perrault v. Her Majesty The Queen, 78 DTC 6272 (F.C.A.)

Assuming the obligations to make the charitable donations are those of the estate and that, only after those liabilities are satisfied does one have a transfer of the remaining property to the surviving spouse, then it would appear that as and to the extent the estate's liabilities are reduced by the corporation's payments of the donations, there is a corresponding section 15 benefit in the hands of the estate in its capacity as shareholder of the shares formerly owned by the deceased husband.

It might also be argued that, since the decision by the corporation to pay the estate's liabilities could presumably only be made with the approval of the majority shareholder, and since that shareholder stands to benefit from such an arrangement to the extent of the difference between the tax savings in the corporation's hands and the tax savings to the estate had it made the donations, then a section 15 benefit would exist to that extent.

Another potential issue which you may wish to consider is whether payments made by the Corporation to the various charitable organizations would constitute gifts by the corporation within the meaning of paragraph 110.1(1)(a) of the Act.

IT Bulletin IT-110R2 states, at subparagraph 3(c), that in order for an amount to qualify as a gift, the transfer must be made without expectation of return.

Similarly, in Her Majesty The Queen v. Burns, (1990), 44 DTC 6335, the Federal Court of Appeal approved the comments of Mr. Justice Pinard in the Federal Court Trial Division that in order for an amount to qualify as a gift for tax purposes "the donor must be aware that he will not receive any compensation other than pure moral benefit; he must be willing to grow poorer for the benefit of the donee"

Assuming the donations to be made by the corporation would be made subject to the charities' waiver of any right to compel the estate to act in accordance with the will, a strong argument could be made that the amounts fail the Burns test for qualification as gifts.

We trust this information is of assistance.

for DirectorBusiness and General Division Legislative and Intergovernmental Affairs Branch