2005 Ruling 2005-0130381R3 - Gift Subject to Conditions

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.

Principal Issues:

Whether a donation constitutes a gift for income tax purposes when the donation is subject to various conditions.

Where a subsidiary, its parent, the controlling shareholder of the parent, and two charities enter into an agreement with respect to a donation, will subsection 15(1) apply to include the amount of the donation made by the subsidiary in the income of its parent or the controlling shareholder of the parent?

Whether the amount of the advantage in respect of the naming rights granted to the controlling shareholder is nil for the purposes of draft subsection 248(31)?

Position:

Based on the facts, it is our view that the donation would constitute a gift for income tax purposes.

Not in this case. The terms of the agreement provide that the subsidiary will make the gift.

Factual determination. In this case, the department, scholarships, chairs, etc. will be named after the shareholder or by the shareholder. Provided that there is no prospective economic benefit associated with the naming rights, it is our opinion that the amount of the advantage would be nil.

Reasons:

In previous files, we concluded that the fact that there are conditions attached to a gift similar to those present in this case does not, in itself, negate the gift.

The subsidiary, its parent, the controlling shareholder of the parent and the charities are all parties to the agreement.

In a previous ruling, we consulted with the Valuations Section on this issue and were advised that in order to have value, there must be a prospective economic benefit associated with the naming rights.

XXXXXXXXXX 						2005-013038

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the additional information provided in subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX).

You advise that to the best of your knowledge and that of the taxpayers referred to above, none of the issues involved in the ruling request:

i. is in an earlier return of the taxpayers or a related person;

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

iii. is under objection by the taxpayers or a related person;

iv. is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and

v. is the subject of a ruling previously issued to the taxpayers, other than XXXXXXXXXX.

Unless otherwise stated, all references to a statute are to the provisions of the Income Tax Act, R.S.C. 1985, 5th Supplement, c.1, as amended, (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.

Our understanding of the relevant definitions, facts, proposed transactions and their purposes is set out below.

DEFINITIONS

a) "Charity" means the XXXXXXXXXX,

b) "Corporation" means XXXXXXXXXX,

c) "CRA" means Canada Revenue Agency,

d) "Department" means the XXXXXXXXXX,

e) "Endowment" means a separate trust fund to be called the XXXXXXXXXX,

f) "Foundation" means the XXXXXXXXXX,

g) "Fund" means a separate trust fund to be called the XXXXXXXXXX,

h) "Holdco" means XXXXXXXXXX,

i) "Individual" means XXXXXXXXXX,

j) "Private corporation" has the meaning assigned by subsection 89(1),

k) "Province" means the Province of XXXXXXXXXX,

l) "Taxable Canadian corporation" has the meaning assigned by subsection 89(1), and

m) "X Department" means XXXXXXXXXX.

FACTS

1) The Individual is a resident of Canada living in the City of XXXXXXXXXX.

2) Holdco is a taxable Canadian corporation and a private corporation. Holdco is a holding company and is controlled by the Individual.

3) The Corporation is a taxable Canadian corporation and a private corporation. The Corporation is a holding company and is wholly-owned by Holdco.

4) Holdco and the Corporation maintain their office in XXXXXXXXXX and their tax services office is in XXXXXXXXXX.

5) The Charity is a university located in XXXXXXXXXX . The Charity is a "charitable organization" within the meaning of subsection 149.1(1) and its charitable registration number is XXXXXXXXXX.

6) The Foundation is a "private foundation" within the meaning of subsection 149.1(1) and its charitable registration number is XXXXXXXXXX.

PROPOSED TRANSACTIONS

7) The Individual, Holdco, the Corporation, the Foundation and the Charity propose to enter into an agreement (the "Agreement"). Pursuant to and subject to the terms and conditions of the Agreement, the Corporation will donate to the Charity $XXXXXXXXXX payable in cash or in shares of a company listed on the XXXXXXXXXX Stock Exchange. The Agreement will be subject to the receipt of favourable rulings from the CRA with respect to the donation of $XXXXXXXXXX or written legal opinions satisfactory to each of the Individual, Holdco, the Corporation and the Foundation that:

a) the proposed donations described in 8 below qualify as charitable gifts under the Act; and

b) when the proposed donations are made by the Corporation, such donations do not constitute a shareholder benefit to the Individual or Holdco; or when made by Holdco or an affiliate of Holdco, such donations do not constitute a shareholder benefit to the Individual.

8) Pursuant to the Agreement:

a) the Corporation will donate to the Charity $XXXXXXXXXX (the "Gift") by no later than XXXXXXXXXX to be held by the Charity in the Fund; and

b) an additional $XXXXXXXXXX (the "Additional Donation") will be donated to the Charity by Holdco, the Corporation, an affiliate of Holdco or the Foundation on or before the Individual's death, or by the Individual by irrevocable bequest in his last will and testament within XXXXXXXXXX years of such death.

9) The annual minimum distributions to be made from the Fund for the purposes specified in 10 below will be:

a) any distributable income, including interest, dividends and realized capital gains earned in the Fund, and

b) $XXXXXXXXXX from the capital of the Fund with the intent that within a period of XXXXXXXXXX years of receipt of the Gift, the funds in the Fund will be fully distributed.

10) The Charity will use the Fund for the following purposes in connection with the Department:

a) XXXXXXXXXX,

b) XXXXXXXXXX,

c) to pay annually $XXXXXXXXXX to subsidize the costs of student field trips,

d) to pay annually $XXXXXXXXXX to subsidize the costs of various clubs, teams, associations directly related to the Department, and

e) after the annual total distribution of funds as referred to in a) to d) above, any amount remaining, not to exceed $XXXXXXXXXX per year will be added to a separate fund called the XXXXXXXXXX. All amounts received in such fund will be used to subsidize costs of faculty travel, recruiting personnel, advertising and public relations, fund raising, course materials, course development, student placement, and additional scholarships.

11) Any required distributions of the Fund in a year not allocated to the purposes specified in 10 above will be added to the Endowment.

12) Pursuant to the Agreement, within XXXXXXXXXX days of receipt of the Gift, the Charity is required to pay not less than $XXXXXXXXXX to the Endowment which will be held in perpetuity. The Charity's obligation to make this payment may be reduced, dollar for dollar, by the amount, if any, paid by the Province to the Endowment.

13) During the XXXXXXXXXX-year period following the payment of the Additional Donation, the Charity may (but is not required) to make additional payments to the Endowment.

14) The annual minimum distributions from the Endowment will be used for the same purposes as the distributions from the Fund as described in 10 above. The annual minimum distribution will be XXXXXXXXXX percent of the fair market value of the Endowment calculated at XXXXXXXXXX in each year. In addition, the amounts specified for the purposes referred to in 10 a) to d) above will be adjusted every XXXXXXXXXX years for inflation with the first adjustment to occur in XXXXXXXXXX.

15) The Agreement provides that the Charity is to make the annual minimum disbursement from the Endowment from the income received, and if necessary from part of the capital, even if such distributions from the capital result in a reduction in the fair market value of the Endowment. Any income earned on the capital of the Endowment that is not disbursed in accordance with the terms of the Agreement will be added to the capital of the Endowment.

16) XXXXXXXXXX.

17)XXXXXXXXXX.

18) Pursuant to the Agreement, the naming of the student scholarships will be permanent and irrevocable. The renaming of the Department to X Department will also be permanent and irrevocable unless the donations described in 8 above are not made in full.

19) In the unlikely event that any material agreements and covenants of the Charity in the Agreement are not performed, the Charity will agree to pay to the Foundation the total amount of the donations as described in 8 above that were received by the Charity plus interest. You advise that in such circumstances, the amount paid to the Foundation will not be designated by the Charity as a "specified gift" as defined in subsection 149.1(1) and the Foundation will expend such amount on charitable activities or by way of gifts to qualified donees in the year of receipt or the immediately following taxation year. In addition, the Charity will pay the donor's legal costs and expenses in relation to the enforcement of any material agreements and covenants in the Agreement. The Agreement provides that if the Foundation ceases to qualify as a registered charity or has been wound up, the amount otherwise payable to the Foundation will be paid in equal shares to each of the universities situate in Canada, other than the Charity, to which the Individual during his lifetime has made or caused to be made by Holdco, an affiliate of Holdco or the Corporation a donation of at least $XXXXXXXXXX, provided that the university is a registered charity.

20) Pursuant to the Agreement, the Individual, the Corporation, Holdco, any affiliate of Holdco and the Foundation will not participate actively in or be employed in the actual day to day operations of the Charity including the X Department.

21) The Gift will be irrevocable in that the Corporation, the Individual, Holdco, an affiliate of Holdco, any related persons other than the Foundation, and their assigns will not be entitled to the return of the amounts donated to the Charity.

PURPOSE OF THE PROPOSED TRANSACTIONS

22) The purpose of the proposed donations is that the Individual, the Corporation and the Foundation wish to spur advancement in XXXXXXXXXX at the Charity.

RULINGS GIVEN

Provided the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, we confirm that:

A. Provided that there is no prospective economic benefit associated with the naming rights described in the Agreement, the amount of cash donated or the fair market value of the shares donated on the date of donation, in satisfaction of the Gift as described in 8(a) above, will qualify as a gift as described in paragraph 110.1(1)(a) if an official receipt containing prescribed information is filed as required by subsection 110.1(2).

B. The undertaking of the Corporation to make the Gift pursuant to the Agreement will not, in and of itself, constitute a benefit conferred on the Individual or Holdco pursuant to subsection 15(1).

OPINION

Provided that there is no prospective economic benefit associated with the naming rights described in the Agreement, it is our opinion that the amount of the advantage of such naming rights would be nil for the purpose of subsection 248(31) of the draft legislation released by the Minister of Finance on February 27, 2004.

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 dated May 17, 2002 and are binding on the CRA provided that the Gift is made by XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
Manager
Financial Institutions Team
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch