2 November 1995 External T.I. 9514165 - DONATION OF TWO SHIPS TO A REGISTERED CHARITY

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:

The taxpayer has requested our views on the most favourable tax way to donate two ships to a registered charity.

Position TAKEN:

Cannot advise on the way to structure a transaction. Provided comments in respect of the application of 110.3 of the Act where all or a part of the capital gain may be eliminated.

Reasons FOR POSITION TAKEN:

When the FMV of the capital property gifted is greater than the ACB, the taxpayer may designate an amount between the ACB and FMV. The designated amount is deemed to be the POD and the FMV for gifting purposes.

L. Barrows
XXXXXXXXXX		951416

Attention: XXXXXXXXXX

November 2, 1995

Dear XXXXXXXXXX:

Re: Donation of Two Ships to a Registered Canadian Charity

Your letter of May 15, 1995 was referred to this Directorate for response.

You have asked for Revenue Canada's advice as to the most effective and favourable tax way for your client to donate two ships to a Registered Canadian Charity. As indicated in your letter, of primary consideration is the fact that a donation of the ships at fair market value ("FMV") will result in a capital gain of approximately $XXXXXXXXXX (USD).

Under an advance ruling, written confirmation of the tax implications, favourable or unfavourable, are given only when full details of a definite, proposed transaction are provided. In this regard, Information Circular 70-6R2 sets out the manner in which an advance ruling request must be submitted. You should note that Revenue Canada is unable to advise you on the way to structure a proposed transaction for the best tax results and that you may wish to seek the advice of a tax professional. Consequently, we are only prepared to provide you with the following general comments.

Comments

Interpretation Bulletin IT-297R2 (IT-297R2) discusses the tax consequences for corporations making a gift in kind to a registered charity pursuant to subsection 110.1(1) of the Income Tax Act (the "Act"). Paragraph 4 of IT-297R2 states the general rule that when anything is disposed of by a taxpayer by way of a gift, the taxpayer is deemed to have received proceeds of disposition ("POD") equal to the FMV of the property in accordance with subparagraph 69(1)(b)(ii) of the Act. A taxpayer must therefore account for any capital gain or loss in respect of the disposition of the capital property at FMV. FMV is also relevant for the purposes of calculating the amount deductible for a gift under subsection 110.1(1) of the Act.

Paragraph 2 of IT-297R2 states that the general rule described above does not apply where the Act provides special rules for gifts in kind. Special rules pertaining to gifts of capital property are discussed in IT-288R2. In the case of a corporation, paragraph 1 of IT-288R2 discusses the provisions of subsection 110.1(3) of the Act wherein the amount of a capital gain otherwise payable on disposition of a capital property by way of a gift may be reduced when the FMV of the capital property gifted is greater than its adjusted cost base ("ACB"). This subsection permits a taxpayer to designate an amount which must be within the limits of no more than the FMV of the property at the time it was gifted and not less than its ACB. The designated amount is deemed to be the POD of the property and its FMV for deduction purposes under subsection 110.1(1) of the Act. This designation will not affect the possible application of the recapture provisions of subsection 13(1), or terminal loss provisions of subsection 20(16) when the capital property gifted is depreciable property.

The above comments relate to the donation of capital property, however, whether property is capital property or inventory is a question of fact to be determined based on a review of all the relevant facts. The comments in IT-297R2 on gifts in kind apply equally to the donation of inventory or capital property except that the taxpayer must account for any income in respect of the disposition of inventory at FMV. In addition, the designation provided for in subsection 110.1(3) is not available for inventory. Where a taxpayer purchases property and shortly thereafter disposes of it, valuation of the property would be an issue as well as capital treatment.

We trust these comments along with enclosed copies of the relevant circular and bulletins will be of assistance to you.

Yours truly,

R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

Enclosures