22 November 2010 External T.I. 2010-0369261E5 - alter ego trust and 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.

Principal Issues: If, as a consequence of a gift, a charity holds a beneficial interest in an alter ego trust, will the restriction in subsection 118.1(13) apply in respect of the gift?

Position: Question of fact. It depends on whether the property held by the donor was a non-qualifying security of the donor within the meaning of subsection 118.1(18).

Reasons: The restriction in subsection 118.1(13) applies in respect of a gift of a non-qualifying security of the donor.

XXXXXXXXXX
									2010-036926
									Kimberly Duval
									(613) 957-8585
November 22, 2010

Dear XXXXXXXXXX :

Re: An interest in an alter ego trust and a non-qualifying security

This is in response to your e-mail correspondence of May 17, 2010 requesting some further commentary from us in regards to our recent response to Question 7 at the 2010 CALU conference. Specifically, you have asked that we consider whether subsection 118.1(13) of the Income Tax Act (the "Act") would apply to limit an individual's claim for a donation tax credit under subsection 118.1(3) of the Act if a registered charity holds a beneficial interest in a trust (e.g., an alter ego trust) that is, immediately after the time of the gift, affiliated with the individual who made the gift.

Our Comments

The "non-qualifying security rules" in subsection 118.1(13) were originally introduced to defer the opportunity for certain donors (individuals not dealing at arm's length with their corporations) to receive a tax benefit by making gifts to a qualified donee of securities in those corporations. Under these rules, the tax benefit associated with the making of a charitable gift is generally restricted unless and until the donee disposes of the security or the security ceases to be a non-qualifying security.

Until March of 2007, subsection 118.1(18) of the Act defined a non-qualifying security of an individual at any time to be an obligation of the individual or a non-arm's length person, a share issued by a corporation with which the individual does not immediately after that time deal at arm's length or any other security issued by the individual or a non-arm's length person (subject to certain exceptions). The definition was then extended to include paragraph (b.1) which refers to a beneficial interest in a trust that is immediately after that time affiliated with the individual or the individual's estate, or a beneficial interest in a trust if the trust immediately after that time holds a non-qualifying security of the individual or estate (or held, at or before that time, a share that is such a non-qualifying security, and that is, after that time, held by the charity).

Where an individual makes a gift of property to a charity that is a non-qualifying security of the individual (and the gift is not an excepted gift), the gift is deemed not to have been made at that time, pursuant to subsection 118.1(13). As such, in our view, it is the nature of the property to the donor that determines whether the restriction in subsection 118.1(13) will apply in respect of a particular gift.

For purposes of the gifting rules, Interpretation Bulletin IT-226R addresses how subsection 118.1(3) applies in certain arrangements where the property of the donor (for example, property transferred to a trust having a charity as a capital beneficiary) is not the same property as that received by the charity at that time, which is the equitable interest in the trust. However, it is our view that the potential application of subsection 118.1(13) to such arrangements would be dependent upon whether the property of the donor would be considered a non-qualifying security of the donor at the time of the gift, within the meaning set out in subsection 118.1(18).

As such, it would ultimately be a question of fact whether the restriction in subsection 118.1(13) would apply in a situation where an individual settles an alter ego trust having a registered charity as the capital beneficiary, based on the nature of the property so transferred on settlement of the trust. By way of example, subsection 118.1(13) would apply where a donor transferred to such an alter ego trust a share of a corporation that was immediately after that time a corporation with whom the donor was not dealing at arm's length. Similarly, if a donor transferred a beneficial interest of the donor in a trust that was, immediately after that time, affiliated with the donor, subsection 118.1(13) would also apply.

This position is consistent with the views expressed by officials of the Department of Finance at the 2009 APFF.

We trust our comments will be of assistance to you.

Yours truly,

Robin Maley
for Division Director
Business and Partnership Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch