Paragraph 38(a)
Administrative Policy
Vorsteveldt v. A.G. (Canada), 24 January 2025 Application pursuant to ss. 18 and 18.1 of the Federal Courts Act under s. 38(a)
The applicant, who realized a capital gain on a July 2024 sale of an Ontario property, brought this application challenging the 7 January 2025 decision of CRA to administer the Act as if the capital gains inclusion rate increase were in effect, on the grounds inter alia that this would be contrary to the rule of law.
Articles
Joint Committtee, "Federal Budget 2024 – Capital Gains Inclusion Rate", 22 January 2025 Joint Committee submission
- While the proposals to generally increase the capital gains inclusion rate (the “Capital Gains Proposals”) were not tabled in Parliament in the form of a bill before Parliament was prorogued on January 6, 2025 and there is substantial possibility that they will never be enacted, the Department of Finance and the CRA have confirmed that the ITA will be administered as though they were enacted.
- This uncertainty as to enactment is unlikely to be resolved prior to the time at which many taxpayers will be required to pay tax and/or file tax returns for their 2024 taxation years, for example, corporations (other than certain CCPCs) with a December 31, 2024 taxation year end are required to pay their tax due for 2024 by February 28, 2025 under the “balance-due day” definition.
- Canadian taxpayers have the choice of:
- Paying tax (and filing their returns) on the basis of existing law, and filing an amendment with additional tax payable in the event the Capital Gains Proposals are enacted with retroactive effect; or
- Paying and filing on the basis of the proposals, and then filing an amendment (or objecting to their own filing) - and applying for a refund if the proposals are withdrawn.
- Neither alternative is satisfactory for the average Canadian taxpayer.
- It is recommended that:
- the Government announce that the Capital Gains Proposals, if enacted, will only be applicable to gains realized after the relevant bill is introduced in Parliament; or (failing that)
- the CRA provide administrative relief by waiving arrears interest and confirming (for greater certainty) that penalties are not applicable to taxpayers paying tax and filing on the basis of existing legislation– until at least the date of the introduction of the relevant bill in Parliament.
Joint Committee, "Subject: Federal Budget 2024 – Capital Gains Inclusion Rate", 1 May 2024 Joint Committee Submission
Comments of the Joint Committee on the design issues for implementing the increase in the capital gains inclusion fraction to 2/3 included:
In order to avoid costs, difficulties, uncertainties, or impediments in actually realizing capital gains before June 25, 2024, taxpayers should be permitted to file an election (see s. 110.6(19)) to be deemed to have realized all or a portion of their accrued capital gains before that date.
Alternatively or in addition, and consistent with the change in the inclusion fractions on January 1, 1988 and January 1, 1990, the effective date should be moved to January 1, 2024.
The increased inclusion fraction should not apply to dispositions of property occurring pursuant to legally binding obligations entered into by the taxpayer in writing before April 16, 2024, subject to some limitations.
With a view to avoiding retroactive effects of the increased inclusion fraction:
- Capital gains reserves from pre-June 25, 2024 dispositions should be brought into income at the ½ rate;
- The ½ deduction should be maintained for distributions from hybrid surplus generated from pre-June 25, 2024 dispositions (which might entail drafting for a second category of hybrid surplus).
- Amendments to s. 110(1)(d.1) should include a continuation of the 50% deduction rate for CCPC options exercised prior to June 25, 2024;
- Capital gains realized by a trust or partnership prior to June 25, 2024 should maintain that time stamp when allocated to beneficiaries or members (which could entail changes to the capital gains refund mechanism).
Canadian individuals should be able to share their $250,000 safe harbour with private corporations of which they are direct or indirect shareholders (or, alternatively, there could be a mechanism to allow for a capital gain to be allocated from a private corporation to an individual).
Examples of trusts negatively impacted by the $250,000 safe harbour not being accorded to them include graduated rate estates, qualified disability and Henson trusts, and alter ego or joint spousal/partner trusts.
Canadians should be permitted to carry forward unused portions of their $250,000 safe harbour room.
Paragraph 38(a.1)
Administrative Policy
31 May 2017 External T.I. 2016-0642621E5 - Donation to private foundation
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 | 60 |
2015 Ruling 2014-0532201R3 - Corporate reorganization
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:
- 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.
- 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.
- Holdco 3 will donate the Donated Shares to the Foundation pursuant to a deed of gift.
- The Foundation will dispose of the Donated Shares to Corporation 20 for cash proceeds of disposition equal to their FMV.
- 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.
- 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 | 65 |
| Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts | donation and sale-back of public company shares | 85 |
31 March 2003 External T.I. 2002-0171835 F - DON D'ACTIONS COTEES EN BOURSE
A taxpayer made a gift of listed shares to a public foundation as defined in section 149.1 which, by virtue of the gift representing more than 50% of the foundation’s capital would cause it to become a private foundation instead.
After noting that a designation by the Minister under s. 149.1(6.3) of the foundation as a private foundation would be effective for taxation years commencing after the day of mailing of the notice, CCRA stated:
[T]he public foundation will be deemed to be a private foundation for taxation years that commence after the date of mailing of the Minister's notice. Consequently, it is our view that the capital gain realized in respect of the donation of shares listed on a prescribed stock exchange to such a public foundation will qualify for the [rate] reduction under paragraph 38(a.1).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 149.1 - Subsection 149.1(6.3) | donation of Pubco shares to public foundation qualified as such given that s. 149.1(6.3) designation not effective until following year | 150 |
Subparagraph 38(a.1)(ii)
Administrative Policy
24 July 2017 External T.I. 2017-0698191E5 - Gift of securities by executors of a will
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 | 173 |
| 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 | 131 |
Paragraph 38(a.2)
See Also
Staltari v. The Queen, 2015 DTC 1130 [at at 818], 2015 TCC 123
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 | 99 |
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Business | no business where no business organization | 167 |
| Tax Topics - Income Tax Act - Section 39 - Subsection 39(1) - Paragraph 39(1)(a) | exclusion of gains that are ordinary income | 149 |
| Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Real Estate | secondary intention to develop land irrelevant if land donated instead | 500 |
Paragraph 38(c)
Administrative Policy
9 August 2002 Internal T.I. 2002-0145817 F - TAUX DE DEDUCTION - PTPE - ANNEE 2000
An allowable business investment loss was recognized by an individual in an amount equal to ½ the business investment loss (BIL) realized by the individual in 2000 given that such loss arose from a deemed disposition pursuant to s. 50(1) which, therefore, was deemed to have occurred on December 31, 2000.