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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
Ramifications to disbursement quota of private foundation if it expends a "10 year" gift prior to end of 10 year period with donor's consent.
Position: Charity cannot expend property prior to 10-year period.
Reasons: A charity may not expend property in violation of the terms of a trust.
XXXXXXXXXX 2003-003149
December 11, 2003
Dear Sirs:
Re: Definition of "Disbursement Quota" - Subsection 149.1(1) of the Act
This is in response to your letter of July 22, 2003 wherein you ask for our views as to the ramifications of hypothetical transactions to a private foundation's "disbursement quota" within the meaning set out in subsection 149.1(1) of the Income Tax Act ("the Act").
The hypothetical transactions may be briefly summarized as follows. An individual, Mr. X, who has established and controls a private foundation donates a property to the foundation subject to a direction that the property is to be held by the foundation for a period of not less than 10 years. The private foundation issues an official tax receipt upon receipt of the property, to the individual for the fair market value of the property at the time of the transfer. Prior to the expiry of the 10-year period, the private foundation seeks to expend the property, with Mr. X's consent.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an Advance Income Tax Ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.
Pursuant to subsection 149.1(4) of the Act, a private foundation must expend on charitable activities carried on by it (and by way of gifts to qualified donees) in a taxation year an amount at least equal to its disbursement quota for the year. A foundation's "disbursement quota" in this regard is defined in subsection 149.1(1) of the Act as a formula based on several factors. Factor "A" of the formula includes in a foundation's disbursement quota 80% of the amounts receipted in the preceding taxation year, except to the extent that the amounts receipted were in respect of a gift of capital received by way of bequest of inheritance, a gift received from another charity, or a gift received subject to a trust or direction to the effect that the property (or property substituted therefor) is to be held by the foundation for a period of not less than 10 years ("a 10 year gift"). Factor A.1 includes in a foundation's disbursement quota amounts that were actually expended by the foundation that were previously excluded from the foundation's disbursement quota pursuant to factor A.
Whether or not a particular transfer of property constitutes a gift depends upon the factual circumstances at the time of the transfer. Similarly, the specific terms of a trust or direction would determine whether a gifted property is a 10-year gift for disbursement quota purposes. However, it is our view that a valid 10-year gift is a trust at law, the terms of which must be respected by the recipient charity. If Mr. X has made a gift of the property for tax purposes, then he will have divested himself of all interest he held in the property. As Mr. X has no further interest in the gift property, his consent to vary the terms of the trust would not be a basis for the charity to expend the property contrary to the terms of the trust or direction. We confirm that our views would be the same if the hypothetical foundation were a public foundation.
We trust that our comments will be of assistance to you. However, as stated in paragraph 22 of Information Circular 70-6R5, this opinion is not a ruling and consequently is not binding on the Canada Customs and Revenue Agency in respect of any particular situation.
Yours truly,
F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings directorate
Policy and Legislation Branch
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