2016-0628181R3 Donation of shares to private foundation

Principal Issues: 1) Whether subsection 129(1.2) applies to a situation where, pursuant to the terms of a will, an estate donates shares of a holding company to a private foundation and immediately after the donation, the holding company redeems the shares triggering a taxable dividend resulting in a dividend refund to the holding company. 2) Where a private foundation received a gift of non-qualifying securities to which paragraph 118.1(13)(a) applied, would paragraph 118.1(13)(c) apply to deem a gift of property to have been made when the foundation subsequently disposes of the non-qualifying securities? If so, would subsection 118.1(15) apply to deem the gift to have been made in the taxation year in which the taxpayer died? 3) Whether a distribution by a spousal trust to a private foundation, on the death of the surviving spouse, in accordance with the testator’s will, would be a gift by the spousal trust for the purpose of claiming a donation tax credit for the year by the spousal trust.

Position: 1) Subsection 129(1.2) does not apply to the acquisition by the private foundation of the shares held by the estate. However, if the spousal trust transfers the shares of the holding company to the foundation, we are of the view that subsection 129(1.2) will apply. 2) Yes, provided the conditions in paragraph 118.1(13)(c) and subsection 118.1(15) are met. 3) No.

Reasons: 1) The main purpose test in subsection 129(1.2) is not met where the estate transfers the shares of the holding company to the foundation because subsections 118.1(4.1) and (5), as amended by Budget 2014 second bill, do not apply to the estate. However, we are of the view that subsection 129(1.2) would apply to the transfer of shares held by the spousal trust to the foundation. Similarly, we are of the view that subsection 129(1.2) might have applied had the surviving spouse’s death occurred after 2015 as the estate would then have been governed by the amended wording of subsections 118.1(4.1) and (5). 2) Based on the facts and legislation. 3) The distribution by the spousal trust to the foundation was made in accordance with the terms of the testator’s will and therefore, the spousal trust would not be considered the donor.

Author: XXXXXXXXXX
Section: ITA 118.1(5), 118.1(13), 118.1(15), 129(1.2)

XXXXXXXXXX                                                                                              2016-062818

XXXXXXXXXX, 2017

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
       XXXXXXXXXX
       XXXXXXXXXX
       XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-named taxpayers. We also acknowledge the information provided in your subsequent correspondence of XXXXXXXXXX and XXXXXXXXXX and during our various telephone conversations in connection with your request.

We understand that, to the best of your knowledge and that of the taxpayers, none of the proposed transactions and/or issues involved in the ruling request are the same as or substantially similar to transactions and/or issues that are:

(i) in a previously filed tax return of the taxpayers or a related person;

(ii) being considered by a tax services office or tax centre in connection with a previously filed tax return of any of the taxpayers or a related person;

(iii) under objection by the taxpayers or a related person;

(iv) the subject of a current or completed court process involving the taxpayers or a related person; or

(v) the subject of a ruling request previously considered by the Income Tax Rulings Directorate.

This document is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and proposed transactions, and any references thereto are otherwise provided solely for the convenience of the reader. Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter, (the “Act”), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

DEFINITIONS:

“ACB” means adjusted cost base;

“FMV” means fair market value;

“Foundation” means XXXXXXXXXX;

“Holdco” means XXXXXXXXXX;

“Holdco Common Shares” means the common shares of Holdco;

“Holdco Preferred Shares” means the Class A preferred shares of Holdco;

“Individual A” means XXXXXXXXXX;

“Individual A’s Wills” means the principal and secondary wills of Individual A;

“Individual B” means XXXXXXXXXX;

“Individual B’s Wills” means the primary and secondary wills of Individual B;

“PUC” means paid-up capital;

“NQS” means non-qualifying securities;

“RDTOH” means refundable dividend tax on hand; and

“Spousal Trust” means the testamentary trust created by Individual A’s Wills as described in 8 below;

Our understanding of the facts, proposed transactions and purposes of the proposed transactions is as follows:

FACTS:

1) Individual A was a resident of XXXXXXXXXX and he died on XXXXXXXXXX.

2) Individual B was a resident of XXXXXXXXXX and she died on XXXXXXXXXX. At all relevant times, Individual B was Individual A’s spouse.

3) The Foundation is a private foundation as defined under subsection 149.1(1) and is a XXXXXXXXXX for purposes of the Act.

4) The Foundation was established by Individual A and Individual B in XXXXXXXXXX.

5) Holdco is an investment holding company incorporated under the XXXXXXXXXX and is a Canadian-controlled private corporation for purposes of the Act. Holdco primarily holds marketable securities and other similar investments, and is not involved in any other business activity.

6) The issued and outstanding share capital of Holdco consists of XXXXXXXXXX Holdco Common Shares and XXXXXXXXXX Holdco Preferred Shares. Each of the Holdco Preferred Shares carries one vote and is redeemable at the option of Holdco for not more than $XXXXXXXXXX ($XXXXXXXXXX in total).

7) At their respective times of death, Individual A held XXXXXXXXXX Holdco Common Shares and all of the Holdco Preferred Shares, and Individual B held the remaining XXXXXXXXXX Holdco Common Shares.

8) The Spousal Trust is a testamentary trust that was created for the benefit of Individual B for her lifetime upon Individual A’s death by Individual A’s Wills.

9) Pursuant to Individual A’s Wills, the residue of Individual A’s principal and secondary estates (after the payment of Individual A’s debts, funeral and testamentary expenses, taxes and a number of specific legacies and XXXXXXXXXX gifts) has been held in the Spousal Trust. The net income derived therefrom was paid to, or for the benefit of, Individual B during her lifetime and, in addition, the trustees of the Spousal Trust had broad discretion to encroach on capital for Individual B’s benefit.

10) Individual A’s Wills provide that, upon the death of the survivor of Individual A and Individual B, the residue of Individual A’s principal and secondary estates or the portion thereof remaining is to be paid and transferred to the Foundation. Since Individual A was survived by Individual B, the residue in the Spousal Trust is to be paid to the Foundation upon the death of Individual B.

11) Individual B’s Wills provide that the residue of her primary and secondary estates (after the payment of her debts, funeral and testamentary expenses, taxes and a number of specific legacies and XXXXXXXXXX gifts) is to be paid and transferred to the Foundation. Individual B’s Wills do not provide for discretionary capital encroachments by the trustees of Individual B’s estate or others.

12) As a consequence of Individual A’s death on XXXXXXXXXX, the XXXXXXXXXX Holdco Common Shares and XXXXXXXXXX Holdco Preferred Shares held by Individual A were transferred (together with the other assets comprising the residue of his principal and secondary estates) to the Spousal Trust in accordance with subsection 70(6).

13) As a consequence of Individual B’s death on XXXXXXXXXX, the XXXXXXXXXX Holdco Common Shares held by Individual B were transferred (together with the other assets comprising the residue of her principal and secondary estates) to Individual B’s estate.
 
14) The aggregate FMV of Holdco as of XXXXXXXXXX was determined to be $XXXXXXXXXX, which amount has been attributed solely to the Holdco Common Shares.

15) Immediately before Individual B’s death, the XXXXXXXXXX Holdco Common Shares held by Individual B had the following attributes:

a) PUC - $XXXXXXXXXX

b) ACB - $XXXXXXXXXX

c) FMV - $XXXXXXXXXX

16) Pursuant to paragraph 70(5)(a), Individual B was deemed to have disposed of her XXXXXXXXXX Holdco Common Shares immediately before her death for proceeds of disposition equal to their FMV immediately before Individual B’s death. The resulting capital gain was reported on Individual B’s terminal return.

17) Pursuant to paragraph 70(5)(b), Individual B’s estate was deemed to have acquired the XXXXXXXXXX Holdco Common Shares held by Individual B at the time of her death at a cost equal to their FMV immediately before Individual B’s death. Accordingly, the XXXXXXXXXX Holdco Common Shares that were acquired by Individual B’s estate had the following attributes on XXXXXXXXXX:

a) PUC - $XXXXXXXXXX

b) ACB - $XXXXXXXXXX

c) FMV - $XXXXXXXXXX

18) The XXXXXXXXXX Holdco Common Shares and XXXXXXXXXX Holdco Preferred Shares held by the Spousal Trust had the following attributes immediately prior to Individual B’s death:

a) Holdco Common Shares

i.  PUC - $XXXXXXXXXX

ii.  ACB - $XXXXXXXXXX

iii.  FMV - $XXXXXXXXXX

b) Holdco Preferred Shares

i.  PUC - $XXXXXXXXXX

ii.  ACB - $XXXXXXXXXX

iii.  FMV - $XXXXXXXXXX

19) Pursuant to paragraph 104(4)(a), the Holdco Common Shares and Holdco Preferred Shares held by the Spousal Trust were deemed to have been disposed of at the end of the day of Individual B’s death for proceeds equal to their FMV at the end of that day and to have been reacquired immediately after that day for the same amount. The Spousal Trust reported the resulting capital gain in computing its income for its taxation year ended XXXXXXXXXX.

20) Following the deemed disposition and reacquisition described in 19 above, the Holdco Common Shares and Holdco Preferred Shares held by the Spousal Trust had the following attributes:

a) Holdco Common Shares

i.  PUC - $XXXXXXXXXX

ii. ACB - $XXXXXXXXXX

iii. FMV - $XXXXXXXXXX

b) Holdco Preferred Shares

i.  PUC - $XXXXXXXXXX

ii.  ACB - $XXXXXXXXXX

iii. FMV - $XXXXXXXXXX

21) As of XXXXXXXXXX, Holdco had RDTOH of $XXXXXXXXXX

PROPOSED TRANSACTIONS

22) Pursuant to Individual B’s Wills, Individual B’s estate will gift the XXXXXXXXXX Holdco Common Shares held by Individual B’s estate to the Foundation.

23) Subsequent to the transfer described in 22 above, Holdco will redeem all of the issued and outstanding Holdco Common Shares held by the Foundation for an amount equal to their FMV, paid in cash or in kind using the assets of Holdco.

OTHER INFORMATION

24) The Holdco Common Shares held by Individual B’s estate are NQS and the proposed gift of the NQS is not an excepted gift as defined in subsection 118.1(19). Accordingly, the proposed gift of the Holdco Common Shares will be deemed not to have been made pursuant to paragraph 118.1(13)(a).

PURPOSES OF THE PROPOSED TRANSACTIONS

25) Individual B’s Wills provide that, upon the death of Individual B, the residue of Individual B’s estate is to be gifted to the Foundation. The purpose of the proposed transaction described in 22 above is to fulfill the wishes of Individual B by transferring the residual assets held in Individual B’s estate to the Foundation.

26) The transfer of the Holdco Common Shares directly to the Foundation, without engaging in any intermediary transactions, is the most efficient way for the trustees of Individual B’s estate to discharge their fiduciary obligations. The purpose of the proposed transaction described in 23 above is to make the relevant underlying assets held by Holdco available to the Foundation for use in its XXXXXXXXXX activities.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions, the proposed transactions are completed in the manner described above, and there are no other transactions which may be relevant to the rulings requested, we confirm the following:

A. Individual B will be deemed to have made a gift of property to the Foundation in accordance with paragraph 118.1(13)(c) of the Act if the Holdco Common Shares gifted to the Foundation as described in 22 above are redeemed by Holdco as described in 23 above and the other conditions in paragraph 118.1(13)(c) of the Act are met, and such gift of property will, pursuant to subsection 118.1(15) of the Act, be deemed to have been made by Individual B in the taxation year in which Individual B died.

B. Subsection 129(1.2) of the Act will not apply in respect of the dividends deemed to have been paid and received as a result of the redemption of the Holdco Common Shares gifted by Individual B’s estate to the Foundation as described in 22 and 23 above.

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R7 issued on April 22, 2016, and are binding on the CRA provided that the proposed transactions are completed before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which if enacted, could have an effect on the rulings provided herein.

OPINION

If the residue in the Spousal Trust transferred to the Foundation as described in 10 above consists of shares of the capital stock of Holdco, it is our view that any dividend that is paid or deemed to be paid on such shares will be deemed by subsection 129(1.2) not to be a taxable dividend for the purposes of subsection 129(1). Further, the transfer of the residue by the Spousal Trust will not constitute a gift by the Spousal Trust to the Foundation and no claim in respect of a XXXXXXXXXX gift will be available to the Spousal Trust.

CAVEATS

Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly the determination of:

a. the PUC of any shares or the FMV or the ACB of any particular asset referred herein;

b. the balance of RDTOH of Holdco;

c. whether the gifted Holdco Common Shares are capital property;

d. the FMV or ACB of the gifted Holdco Common shares;

e. any other tax consequence relating to the facts or proposed transactions or any transaction or event taking place either prior to the proposed transactions or subsequent to the proposed transactions, whether described in this letter or not, other those specifically described in the ruling given above.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

XXXXXXXXXX
For Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2018

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2018