Section 38

Paragraph 38(a.1)

Administrative Policy

31 May 2017 External T.I. 2016-0642621E5 - Donation to private foundation

s. 38(a.1) prevails over s. 69(4)

A private foundation is the sole shareholder of a corporation (whose shares are exempt shares). The corporation transfers publicly listed securities held by the corporation to the foundation for no proceeds. Would what otherwise be a taxable capital gain be deemed to be nil because of the application of s. 38(a.1). CRA responded:

[W]here a taxpayer has disposed of anything by way of gift to any person, paragraph 69(1)(b) will apply to deem the taxpayer to have received proceeds of disposition equal to the fair market value (“FMV”) of the disposed property. Similarly, subsection 69(4) generally provides for deemed proceeds of disposition at FMV where property of a corporation has been appropriated to or for the benefit of a shareholder under certain circumstances. …

As noted above, paragraph 38(a.1) will apply to deem a taxpayer’s taxable capital gain from a disposition of certain securities to be nil when the disposition is the making of a gift to a qualified donee. Whether a transfer of property constitutes a gift is a factual determination having regard to the legal meaning of a gift.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 69 - Subsection 69(4) implicit finding that s. 69(4) could apply to a gift 58

2015 Ruling 2014-0532201R3 - Corporate reorganization

donation of pubco shares to foundation and immediate cash sale to affiliate

Background

This reorganization concerns a Canadian corporate group for which five named individuals (B to F), a spousal trust for D and four personal trusts, are named as the ultimate shareholders. Only transactions bearing on the gift rulings are summarized. The Foundation, which is a registered charity formed by A (the spouse of D), holds shares of Corporation 17, a public corporation. The XX Trust owns all the shares of Corporation 25, a CCPC. Trust 2 owns common shares of Corporation 18, a CCPC, and the balance of the shares of Corporation 18 are owned by Corporation 25. Corporation 18 owns two classes of shares of Corporation 17, as well as common shares of Corporation 15 which, in turn, owns common shares of Corporation 20.

Proposed transactions

Transactions proposed to occur on Day 1 of an internal reorganization stretching over seven days include the following:

  1. Corporation 15 will transfer its shares of Corporation 17 and some of its intercorporate shareholdings to a newly-incorporated subsidiary (Newco Corporation 15) for non-share consideration equal to the fair market value of the transferred assets and in consideration for common shares of Newco Corporation 15, with a joint s. 85(1) election being made.
  2. After forming Holdco 3, Corporation 18 will transfer Class XX shares of Corporation 17 (the “Donated Shares”) to Holdco 3 in exchange for redeemable retractable preference shares of Holdco, with a joint s. 85(1) election being made.
  3. Holdco 3 will donate the Donated Shares to the Foundation pursuant to a deed of gift.
  4. The Foundation will dispose of the Donated Shares to Corporation 20 for cash proceeds of disposition equal to their FMV.
  5. Newco Corporation 15 will transfer its shares of Corporation 17 (the “Transferred Shares”) to Holdco 3 for non-share consideration equal to the ACB of the Transferred Shares and for redeemable retractable preference shares of Holdco 3, with a joint s. 85(1) election being made.
  6. Holdco 3 will transfer the Transferred Shares to Corporation 20 for non-share consideration equal to their fair market value. Holdco 3 will report a taxable capital gain in respect of this disposition, and claim a deduction for charitable gifts in respect of the donation in computing its taxable income.
Rulings
  • Provided that the s. 248(30) conditions and the s. 110.1 receipt requirements are satisfied, the share donation in 5 will be considered a gift for purposes of s. 110.1(1)(a) and the eligible amount of the gift under s. 248(31) will be the FMV of the Donated Shares at the time the gift is made less the amount of any advantage as defined in s. 248(32).
  • Provided that the Donated Shares are capital property to Holdco 3, no portion of the capital gain arising from the disposition of the Donated Shares, if any, resulting from the making of the gift of the Donated Shares to the Foundation will be included in computing Holdco 3’s Taxable Capital Gain pursuant to paragraph 38(a.1).
  • The full amount of the capital gain arising from the disposition of the Donated Shares on the donation will be added to the CDA of Holdco 3.
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84 - Subsection 84(3) cancellation of upstream shareholding on s. 88(1) wind-up 61
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts donation and sale-back of public company shares 82

Subparagraph 38(a.1)(ii)

Administrative Policy

24 July 2017 External T.I. 2017-0698191E5 - Gift of securities by executors of a will

s. 38(a.1)(ii) zeroes post-death appreciation on estate-donated shares

Following the death of the deceased in 2016, the executors of his estate (a graduated rate estate) make a discretionary donation of mutual fund units (whose adjusted cost base had been stepped-up under s. 70(5)) to a registered charity, would s. 38(a.1)(ii) apply, so that the 50% inclusion rate in the 2016 final return would, through an amendment of the return, be reduced to 0%? CRA responded:

Subparagraph 38(a.1)(ii) provides for a nil taxable capital gain if a disposition is deemed by section 70 to have occurred and the property is:

  • a security described in subparagraph 38(a.1)(i), and
  • the subject of a gift to which subsection 118.1(5.1) applies and that is made by the individual's GRE to a qualified donee.

We agree [that the] gain on the mutual fund units would be calculated at the time of death, however the inclusion rate would be recalculated to be zero as per subparagraph 38(a.1)(ii).

… [T]he taxable capital gain in respect of any subsequent increase in value of the mutual fund units from the date of death to the date of disposition by the GRE to the qualified donee will also be equal to zero pursuant to subparagraph 38(a.1)(i).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(5) - Paragraph 118.1(5)(b) an estate gift of sales proceeds of s. 70(5) property can be carried back to the terminal return 161
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts - Paragraph (c) - Subparagraph (c)(i) - Clause (c)(i)(C) estate gift of cash proceeds of s. 70(5) securities can be carried back to terminal return 129

Paragraph 38(a.2)

See Also

Staltari v. The Queen, 2015 DTC 1130 [at 818], 2015 TCC 123

land donated in order to achieve tax benefit was still a gift to a qualified donee

A commercial real estate broker donated land to the City of Ottawa, received a charitable receipt for its appraised value and claimed that his (substantial) gain was exempted under s. 38(a.2).

Owen J found that the evidence, including that the taxpayer applied for subdivision approval before donating, suggested that a secondary intention of developing and selling the land may have partly motivated the taxpayer's original purchase. However, per Zelinski, "a secondary intention to resell at a profit only acquires importance where a taxpayer follows through on that intention," whereas the land was donated instead. Accordingly, the taxpayer's taxable capital gain arising on the donation was exempted under s. 38(a.2). See summary under s. 9 – capital gain v. profit – real estate.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence uncorroborated testimony 80
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Business no business where no business organization 155
Tax Topics - Income Tax Act - Section 39 - Subsection 39(1) - Paragraph 39(1)(a) exclusion of gains that are ordinary income 139
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Real Estate secondary intention to develop land irrelevant if land donated instead 484