29 February 1984 Income Tax Severed Letter 5-5974 - [Donation of a gross overriding royalty to a private charitable foundation Section 149.1 of the Income Tax Act (the "Act")]

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.

Revenue Canada Taxation Head Office

XXXX

J.C. Clark (613) 593-6201

Attention: XXXX

February 29, 1984

Dear Sirs:

 Re: Donation of a gross overriding royalty to a 
        private charitable foundation 
        Section 149.1 of the Income Tax Act (the "Act")

Your letter of November 7, 1983 addressed to our Charitable and Non-Profit Organizations Section was referred to Corporate Rulings Directorate for reply. You asked four questions involving an interpretation of section 149.1 of the Act as it relates to the donation of a gross overriding royalty ("GOR") to a charitable foundation that is a private foundation. Charitable foundation is defined in paragraph 149.1(1) (a) of the Act and private foundation is defined in paragraph 149.1(1)(f). The GOR is in respect of a Canadian resource property, as defined in paragraph 66(15)(c) of the Act ("CRP"). Our answers appear below in the order in which the questions were listed in your letter.

1. A GOR is a CRP, pursuant to paragraph 66(15)(c). We agree that a CRP is not a capital property within the meaning of paragraph 54(b) of the Act, since any gain from a disposition of a CRP does not give rise to a capital gain or loss, pursuant to subparagraph 39(1)(a)(ii). Consequently a CRP is not included in determining the disbursement quota under subparagraph 149.1(1)(e)(i). Income from a CRP would be included in the amount determined under subparagraph 149.1(1)(e)(ii). The value of the CRP would also be included in the foundation's disbursement quota under sub-paragraph 149.1(1)(e)(ii), except if it is excluded from the foundation's income pursuant to paragraph 149.1(12)(b).

2. A CRP is not included in the definition of qualified investment for purposes of paragraph 149.1(1)(1) of the Act.

3. In our opinion the foundation would be required to include the fair market value of the CRP in its income in the year in which it is received, pursuant to paragraph 149.1(12)(b). Subsequent royalty payments would also be included in the foundation's income.

Providing the donor has in fact transferred his entire interest in the GOR to the foundation, he will be deemed at the date of the donation to have received proceeds of disposition equal to the fair market value of the GOR pursuant to subparagraph 69(1)(b)(ii). The donor will be entitled to claim a donation deduction under and as limited by paragraph 110(l)(a) in the year of the donation, equal to the fair market value of the GOR. The donor will not be entitled to any further donation claims in respect of any payments received under the terms of the GOR by the foundation.

You expressed concern that the: taxation of the value of the NPI in the donor's hands pursuant to paragraph 69(l)(b) and the subsequent inclusion of the royalty payments in the charity's income effectively results in a duplicated income inclusion. Our view is that a royalty interest is an identifiable property which can be bought and sold, which is distinct from the series of payments that are made to the owner of a royalty interest. This is consistent with the scheme of the Act which treats the acquisition and disposition of royalty interests as acquisitions and dispositions of CRP's. These transactions result in inclusions in and reductions of a taxpayer's cumulative Canadian oil and gas property expense ("CCOGPE"), pursuant to paragraph 66.4(5)(b) of the Act. Receipts of royalty payments are dealt with separately in the Act, being included in the recipients income pursuant to paragraph 12(1)(g) of the Act.

Where there is a gift of a royalty interest, the deemed proceeds referred to in paragraph 69(1)(b) will be considered to be an amount described in clause 66.4(5)(b)(v)(A) and subsection 59(1.2), resulting in a reduction of the donor's CCOGPE. The donee will have a CRP cost included in its CCOGPE equal to the deemed cost described in paragraph 69(l) (c) of the Act.

4. Pursuant to subparagraph 149.1(12)(b)(i), the fair market value of the GOP as of the donation date will not be required to be included in the foundation's income, provided that the donor directs that the GOP is to be held by the charity for a period of not less than ten years.

This provision would not apply to exclude future royalty payments from the charity's income.

The answers given above are expressions of opinion and not rulings, and are therefore not binding upon Revenue Canada, Taxation, as explained in paragraph 24 of Information Circular 70-6R, issued on December 18, 1978.

Please note that clauses 27 to 34 of the Notice of Ways and Means Motion to Amend the Income Tax Act tabled in the House of Commons by the Minister of Finance on February 15, 1984 contain a number of proposed changes to the provisions of the Act affecting charities.

Yours truly,

Chief Mines, Oil & Forest Industries Section Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch