24 February 1998 External T.I. 9723485 - gift of public traded secur&char. annuit.

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:

1) Can a taxpayer make a gift of publicly traded securities to a registered charity and request that the charity consider the total value of the securities to represent capital contributed for the purchase of a charitable gift annuity?

2) Can a registered charity accept any form of capital other than cash towards the purchase of a charitable gift annuity?

3) If a registered charity can accept publicly traded shares as payment for the charitable gift annuity, would the amount of the taxable capital gains be used to determine the value of the donation?

Position:

In the particular situation, there has not been a gift of the publicly traded shares. However, where a taxpayer uses publicly traded shares to purchase an annuity from a registered charity, we would consider that there has been a gift equal to the excess of the fair market value of the shares over the total amount of the annuity payments expected to be received by the donor, pursuant to IT-111R2. In a situation where a donor uses publicly traded shares to purchase an annuity from a registered charity, the donor cannot make an election under subsection 118.1(6), because technically there is no “gift”.

Reasons:

Department’s position as stated in previous correspondence and IT bulletins. See # 56309, 9430695, 9702488, 9335805, 9326897, 9201395, 51672, 940972. Also see Q. 7 of the Feb. 1994 Round Table.

972348
XXXXXXXXXX G. Moore

February 24, 1998

Dear XXXXXXXXXX:

Re: Gifting of Publicly Traded Securities and Charitable Annuities

This is in reply to your letter of August 12, 1997, addressed to the Charities Division, regarding the donation of publicly traded shares to a registered charity in return for a charitable annuity.

You describe a situation in which an individual gives shares listed on a prescribed stock exchange (referred to as “publicly traded shares” in this letter) to a registered charity and receives a charitable annuity. You have asked if a charity can accept any form of capital, other than cash, towards the purchase of a charitable annuity. You have also enquired how the amount of the donation would be calculated if the charity accepted publicly traded shares as payment for the purchase of a charitable annuity.

We offer the following general comments.

Our Comments

In general terms, a gift, for purposes of the charitable donations tax credit under section 118.1 of the Income Tax Act (the “Act”), is a voluntary transfer of property without valuable consideration. It is our view that the publicly traded shares would not, in itself, be a gift because valuable consideration (i.e. the annuity) will be received. However, for purposes of the Department’s position set out in IT-111R2, Annuities Purchased from Charitable Organizations, if a donor makes an irrevocable contribution of publicly traded shares to a registered charity in return for a life annuity, it is our view that the amount of the charitable donation to the registered charity would be equal to the excess, if any, of the amount paid for the life annuity over the total of the annuity payments expected to be received by the donor pursuant to the life expectancy tables provided in IT-111R2. An individual would be entitled to a charitable donations tax credit for the gift to the extent allowed by subsection 118.1(3) of the Act provided an official receipt is produced in accordance with Part XXXV of the Income Tax Regulations. In the circumstances outlined in paragraph 3 of IT-111R2, no portion of the annuity payments received by the donor will be taxable. If the amount paid for the annuity is the same or less than the annuity payments expected to be received back, paragraph 1 of IT-111R2 applies.

Whether a gain on the disposition of the publicly traded shares to the registered charity would be on account of capital or income is a question of fact that may only be determined after a review of all the facts of a particular case. When publicly traded shares are disposed of to a registered charity or some other arm’s length party, it is our view that it should not alter the nature of the gain. Assuming an individual acquired publicly traded shares as a capital property to earn income, as opposed to a speculative investment to be resold at a profit, generally, any gain on disposition would probably be considered a capital gain.

Proposed paragraph 38(a.1) in Bill C-28 will reduce the income inclusion rate on capital gains arising from the disposition of publicly traded shares where the disposition is the making of a gift to a qualified donee, other than a private foundation, from 75 per cent to 37.5 per cent. This amendment applies to gifts made after February 18, 1997, and before 2002. However, in the situation described above, it is our view that the publicly traded shares would not, in itself, be a gift because valuable consideration (i.e. the annuity) will be received. Accordingly, the inclusion rate would be 75 per cent for the capital gain, if any, arising on the disposition of the publicly traded shares that are used to purchase an annuity from a registered charity.

We trust our comments will be of assistance to you. Please note, however, that these comments represent our opinion of the law as it applies generally and accordingly, are not binding on the Department.

Yours truly,

John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch