22 January 2002 External T.I. 2001-0103315 - CONTRIB. TO CORPORATE CAPITAL

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: Can the receipt of a property that is not considered a "gift" to the transferor be a property acquired "by way of gift" to the transferee.

Position: No

Reasons: By definition (i.e., the voluntary transfer of property...) the term "gift" must be looked at from the point of view of the person transferring the property.

XXXXXXXXXX 2001-010331
J. E. Grisé
January 22, 2002

Dear XXXXXXXXXX:

Re: Contribution to Corporate Capital

This is in reply to your letter of September 20, 2001, requesting our view on the cost to a corporation of property received by way of capital contributed by a major shareholder of the corporation for no consideration.

Paragraph 69(1)(c) of the Income Tax Act (the Act) applies where a taxpayer has acquired property by way of "gift, bequest or inheritance". The term "gift" is not defined in the Act and therefore assumes its common law meaning. In general terms, a gift at common law is a voluntary transfer of property from a donor, who must freely dispose of his or her property to a donee who receives the property given. The transaction may not result directly or indirectly in a right, privilege, benefit, or advantage to the donor. In our view, the transfer of a property to a corporation by a majority shareholder of that corporation for no consideration would not result in a gift to the corporation, since the transaction would clearly result in a benefit to the shareholder in the form of an increase in the value of the shareholder's interest in the corporation.

In such circumstances, the property would have no cost to the transferee corporation. You indicate that the numerous implications of a nil cost result are difficult to accept as either intended or actual. In view of such a result, other means of contributing property to a corporation should be considered, such as, a sale at fair market value or the use of section 85 of the Act.

As you know, our role is to administer and enforce the Act as adopted by Parliament. To the extent that you consider that the existing provisions of the Act do not provide for a reasonable treatment of the transfer of property in situations such as the one described in your request, a change in tax policy and legislative amendments to the Act would be required. These are the responsibility of the Department of Finance. If you wish to pursue this matter with the Department of Finance, Tax Policy Branch, they can be contacted at:

L'Esplanade Laurier
140 O'Connor Street
Ottawa, Ontario
K1A 0G5

We hope our comments are helpful.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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