Prospective donors and registered charities should take note of a recent Canada Revenue Agency (“CRA”) Advance Income Tax Ruling on the donation of exchangeable shares.
CRA recently considered whether the fact pattern and transaction described herein enables a donor to gift exchangeable shares without any capital gains tax on the disposition of exchangeable shares. The facts on which CRA provided its ruling are as follows:
- Taxpayers hold exchangeable shares in Corporation A;
- Corporation A is controlled by Corporation B. The ordinary shares of Corporation B are listed for trading on a designated stock exchange;
- Each of the taxpayers owns non-voting exchangeable shares in the share capital of Corporation A (the “Exchangeable Shares”). The particulars of the Exchangeable Shares are as follows:
- Each Exchangeable Share is equivalent to one Corporation B share and includes a right to exchange the share for a Corporation B share;
- Holders of Exchangeable Shares are entitled to give notice of an intention to exercise a right to exchange their Exchangeable Shares (the “Notice”) for Corporation B shares (the “Consideration”);
- Upon receipt of a Notice, Corporation B or a subsidiary of Corporation B (other than Corporation A) has an overriding right to purchase the Exchangeable Shares for the Consideration (“Call Right);
- If Corporation B or a subsidiary of Corporation B (other than Corporation A) fails to exercise its overriding right described above, the holder of the Exchangeable Shares must redeem their Exchangeable Shares for the Consideration.
Based on the above facts, the taxpayers purport to undertake the following transaction:
- Each of the holders of the Exchangeable Shares delivers a Notice to Corporation A for all of their Exchangeable Shares;
- Corporation B or a subsidiary (other than Corporation A) will exercise its Call Right, or the holder of the Exchangeable Shares will redeem their Exchangeable Shares for an equivalent number of Corporation B shares;
- The only consideration received by the holder of the Exchangeable Shares is shares in Corporation B;
- Within 30 days of the exchange, the former holders of the Exchangeable Shares will gift the recently received Corporation B shares (the “Donated Shares”) to a qualified donee and there is no advantage in respect of the gift.
CRA ruled that to the extent that the taxpayer has a capital gain arising from the disposition of the Exchangeable Shares, the capital gain will be deemed to be zero if the following elements are met:
(a) At the time of the exchange, the Corporation B shares are listed on a designated stock exchange;
(b) The only consideration received on the exchange is Corporation B Shares;
(c) The Exchangeable Shares are capital property (as defined in the Income Tax Act) of the taxpayer;
(d) The taxpayer gifts the Corporation B shares to a qualified donee within 30 days of the exchange;
(e) The recipient of the gift is a qualified donee at the time the gift is made; and
(f) The amount of the advantage is nil.
This ruling confirms CRA’s position with respect to the capital gains treatment on the disposition of exchangeable shares and donors holding exchangeable shares should keep this ruling in mind when considering their philanthropic activities.