TAX-PLANNED CHARITABLE GIFTING -
OPPORTUNITIES AND HURDLES

I. INTRODUCTION

This paper focuses on the income tax treatment under the Income Tax Act (Canada) (the "ITA") of charitable donations available primarily to individuals for estate planning purposes. Generally, individuals giving to registered charities under the ITA are entitled to utilize donation receipts for gifts of up to 75% of the value of their taxable income for a year in calculating tax credits under subsection 118.1(3) of the ITA. A taxpayer may utilize donation receipts of up to 100% of taxable income for gifts made in the year of death in calculating tax credits and these tax credits can be applied to the previous year if they cannot be used in the year of death (subsection 118.1(4)) . Gifts made in a will are deemed to be made in the year of death (subsection 118.1(5)). One hundred percent of taxable income arising from capital gains and recapture can be offset with a donation receipt in respect of the property giving rise to the gains or recapture.

By carefully considering how to exercise one's benevolence, it is possible to maximize the income tax benefits of charitable giving while minimizing the after tax costs of giving. This paper discusses to whom tax effective gifts can be made, what types of gifts should be considered, when these gifts should be made and how they should be made to maximize a particular individual's tax benefits from a charitable gift.

II. TO WHOM SHOULD WE GIVE?

While the choice of charity to benefit either by way of inter vivos gift or by bequest is a very personal choice driven by numerous individual considerations, the ultimate choice of charitable donee does affect the tax benefits available. Different types of organizations receive different treatment under the ITA, and thus some may be better suited for the type of planning needed by a particular individual than others.

A. CROWN FOUNDATIONS

Until recently, gifts to Crown organizations received preferential treatment under the ITA in that donation receipts for gifts to Crown organizations of up to 100% of annual taxable income could be utilized in the calculation of tax credits. The preference for Crown entities has been eliminated so that Crown and non-Crown charitable gifts are given equal treatment. Only donations to the Crown up to 75% of the annual income can now be utilized in the calculation of tax credits. Because Crown foundations are not subject to the disbursement quota rules imposed by section 149.1 of the ITA requiring charities to distribute certain monies in a year, Crown foundations may be more flexible in accepting gifts which are not easily distributed within the mandated time frame.

B. PUBLIC FOUNDATIONS

"Public Foundations" are defined in subsection 149.1(1) of the ITA as follows:

"Public foundation" means a charitable foundation of which,

(a) where the foundation has been registered after February 15, 1984 or designated as a charitable organization or private foundation pursuant to subsection (6.3) or to subsection 110(8.1) or (8.2) of the ITA, chapter 148 of the Revised Statutes of Canada, 1952,

(i) more than 50% of the directors, trustees, officers or like officials deal with each other and with each of the other directors, trustees, officers or officials at arm's length, and
(ii) not more than 50% of the capital contributed or otherwise paid in to the foundation has been so contributed or otherwise paid in by one person or members of a group of such persons who do not deal with each other at arm's length, or

(b) in any other case

(i) more than 50% of the directors or trustees deal with each other and with each of the other directors or trustees at arm's length, and
(ii) not more than 75% of the capital contributed or otherwise paid in to the foundation has been so contributed or otherwise paid in by one person or by a group of persons who do not deal with each other at arm's length and, for the purpose of subparagraph (a)(ii), a reference to any person or to members of a group does not include a reference to Her Majesty in right of Canada or a province, a municipality, another registered charity that is not a private foundation, or any club, society or association described in paragraph 149(1)(l);

Where a foundation meets the criteria for a public foundation set out in subsection 149.1(1) the foundation is able to receive certain gifts of publicly traded securities with beneficial tax consequences not available to private foundations. These benefits will be discussed below with respect to public securities. As well certain private company shares can be given to public foundations which are deemed not to be gifts if made to private foundations.

C. PRIVATE FOUNDATIONS

Private foundations are all those charitable foundations not falling within the definition of public foundations. These would include foundations whose key actors are not at arm's length and whose contributed capital is derived largely from one source. Private foundations may be established by individuals and utilized to make inter vivos gifts as well as to make gifts through a will. In effect, an individual can establish their own charity and then give to that charity. The private foundation can in turn distribute the funds received to other charitable organizations. In creating such a foundation, however, care must be taken to ensure that the foundation's activities and purposes meet the definition of a 'charitable foundation' in subsection 149.1(1).

The primary estate planning benefit of establishing a private foundation is the flexibility and control afforded to the would-be donor. The creator of the foundation can control the foundation's functions. Even after a gift to a private foundation is made, the charities to be benefited by the foundation can be changed. The ability to change focus after a gift is made is of particular value where a bequest is made in a will. As well, inter vivos donations can be made in the manner most beneficial to the donor in terms of both type of donation and timing of donation.

D. SPECIFIC RECIPIENTS OF GIFTS

Some types of gifts must be made to specific entities in order to receive the most beneficial tax treatment. For instance, where a gift of ecological land is made the gift must be made to Canadian municipalities or registered charities approved by the Minister that have one of their objects as being conservation or preservation of Canada's environmental heritage in order to receive the preferred treatment accorded to such gifts. Likewise, gifts of cultural artifacts must be given to an institution or public authority in Canada that at the time the gift was made was designated in the Cultural Property Export and Import Act. The benefits flowing from ecological or cultural artifact gifts will be discussed below.

III. WHAT TO GIVE?

Just as individuals own all manner of property from cash to cars, charities can also receive all manner of property as donations. The type of property given will have a bearing on the tax treatment of the gift and the type of tax benefit that can be achieved by making such a gift.

A. CASH

Donations of cash are the simplest form of a charitable donation an individual can make. They are simplest both with respect to the actual making of the gift and the valuation of the gift for the purposes of obtaining a donation receipt. It is relatively easy to prove that the gift has been made and the value of the gift is the face value of the cash, unless of course the actual notes or coins given have some intrinsic value beyond their face value. There is no capital gain associated with a gift of cash and thus the gift itself does not add to the taxable income of the donor. In spite of the simplicity of cash gifts, a donation of cash to charities does not provide any opportunity to receive additional tax benefits beyond the straight calculation of credits based on the monetary amount.

B. PUBLIC SECURITIES

The special treatment of the capital gains resulting from the donation enhances the benefit of making a charitable donation beyond the simple calculation of credits based on the value of the gift. While a donor of publicly traded securities to a registered charity (other than a private foundation) is entitled to a charitable donation receipt for the fair market value of the donated securities, the capital gain resulting from the gift will be reduced so that the income inclusion in the donor's hands is 33.3% of the gross capital gain. Without the special treatment, 66.67% of the capital gain would be included in the donor's taxable income. For example, consider a taxpayer who has publicly traded securities with an adjusted cost base of $100 and a fair market value of $500. If the taxpayer were to sell the securities he or she would trigger a gain of $400; $267 of this capital gain would be brought into income as taxable income due to the 2/3 inclusion rate for capital gains. If the taxpayer liquidated securities and made a gift of the $500 in proceeds the taxpayer would use $267 of the donation receipt to offset the taxable income on the sale. The donor would have $233 of receipt remaining which would save about $117 at the top tax bracket. However, if the taxpayer made a gift in kind of the securities to a charity other than a private foundation, he or she would receive a $500 charitable donation receipt, just as if the gift had been liquidated before donation. However, the taxable income resulting from the gift would not be $267 but $133 (33.3% of $400). The taxpayer would receive the same credit, but would use only $133 of the credit to offset the taxable income. He or she would have $367 of receipt remaining which is worth about $185 at the top rate. By making a gift in kind the taxpayer effectively receives greater benefit from the same credits.

It must be emphasized that gifts of publicly traded securities to private foundations do not enjoy the reduced inclusion rate for capital gains. The current provisions provide only for reduced rates on gifts of publicly traded securities to public foundations until December 31, 2001, although the government has suggested the incentive may be extended.

Where estate planning is done prior to December 31, 2001, advisors should consider including a power to take advantage of this special benefit, but should be mindful that should the individual not die until after December 31, 2001, some alternative method of distribution should be provided. One potential issue in making gifts of publicly traded securities is in valuing them and determining their disposition cost. If a group of shares is split and then donated to several charities different valuation methods may be used by the various donee charities. The most common method is to use the closing price on the date that the charity receives the securities, but some charities also use the average of the day's high and low values. The uncertainty as to the value, and thus the potential credit available, may cause concern to the donor in relying on receipt values for income tax purposes.

C. PRIVATE COMPANY SHARES

Private company shares do not get the same beneficial treatment as publicly traded securities. Like the exclusion of private foundations from the reduction in the inclusion rate for capital gains where gifts of publicly traded securities are made, private securities are not included with public securities in the scheme allowing only half of the capital gains to be included in income. Gifts of private securities that fall within the class of "excepted gifts" as defined in subsection 118.1(19) qualify as charitable gifts for the purposes of receiving tax credits, but do not receive the preferential treatment accorded to publicly traded securities. The "excepted gifts" are gifts of shares where the donee is not a private foundation, the taxpayer deals at arm's length with the donee and where the donee is a charitable organization or public foundation the donor deals at arm's length with each of the principal actors of the donee. While they do not receive the preferred status of publicly traded shares, excepted gifts give rise to tax credits as any other charitable gift.

There is, however, an explicit bias in the ITA against gifts of "non-qualifying securities". Subsection 118.1(13) provides that where an individual makes a gift of a non-qualifying security that would otherwise be a charitable gift giving rise to a credit and the gift is not in that class of "excepted gifts", the gift is deemed not to have been made. In other words where an individual makes a gift of a non-qualifying security, the gift never occurred for the purposes of donation receipting and therefore no tax credit is available. "Non-qualifying securities" are defined in subsection 118.1(18) to mean an obligation of the individual or a non-arm's length person, a share issued by a corporation with which the individual does not deal at arm's length or any other security issued by the individual or a non-arm's length person. Thus, wherever an individual has an obligation or share in a corporation, or someone with whom they are not at arm's-length has such a security, and that security is given to a charity in a manner that is not an excepted gift, no gift will have occurred and, thus no tax benefit exists. Obviously, gifts of non-qualifying securities are not precluded by subsection 118.1(13), but no tax benefits will be received for such; the joy of giving must then be sufficient. It should be noted that if a gift of a non-qualifying security ceases to be non-qualifying within 60 months of the donation or the donee disposes of the security within 60 months, the donor may be deemed to have made a valid charitable gift at that time pursuant to paragraphs 118.1(13)(b) and (c).

D. HEDGE FUND UNITS

The donation of hedge fund units is an opportunity to take advantage of a tax shelter when making charitable donations. A hedge fund is an investment vehicle designed to produce a positive return whether the market goes up or down through the use of offsetting investments. While it is intended to reduce the risk of investment, there is a significant risk involved in hedge funds in that they are highly leveraged. The manner in which hedge funds create a tax shelter is illustrated by the following example:

An investor makes an investment of a million dollars to acquire 1,000 units in the fund at a price of $1,000 per unit.

(i) The purchase price for a unit is $250 cash payment and a promissory note for the balance of the $750.
(ii) The promissory note is non-interest bearing and is payable in 20 years.
(iii) As security for payment of the note, the investor pledges 30% of the units acquired by him or her back to the hedge fund.
(iv) The remaining 70% of the units purchased by the investor are free of encumbrances and can be transferred by the investor to a third person.
(v) The organizers solicit a number of charities to be included in a list of permitted transferees of the units which have not been pledged as security for the promissory note given by the investors.

In this way, donations of units only partially paid for by the donors can be made to charities in exchange for receipts of the full value of the unit. There are several significant problems with such a gift, however.

The value of the unit is a problematic issue in the above scenario. The face value of the unit is not necessarily the value that Revenue Canada will accept as being the value of the unit for the purposes of income tax receipts. A number of charities that have participated in such plans have asked that the units be independently valued. A related problem is the cost base of the unit. If the donor's adjusted cost base of the unit is held not to be the face value, but some lower value (as a result of having paid only a portion of the purchase price up front) then a capital gain will be realized on the gift and the value of the credit received will effectively be reduced. If the scheme constitutes a "tax shelter" as defined in section 237.1 of the Act, the tax shelter will be subject to review by Revenue Canada. A tax shelter is one where a promoter represents the deductions available to an investor will equal or exceed the cost to the investor of the investment within four years. If a hedge fund is only promoted to individuals it will not likely be characterized as a tax shelter because donations by individuals do not give rise to deductions, only to tax credits.

Finally, and perhaps most importantly, a gift as described above may be subject to scrutiny by the Canadian Customs and Revenue Agency (formerly known as Revenue Canada) pursuant to the general anti-avoidance rule ("GAAR") in section 245 of the Act. If the transaction is found to be an "avoidance transaction", which is quite possible in these circumstances, the tax benefit could be denied. These risks may make such gifts unattractive to all but the most fearless of potential donors.

E. CULTURAL ARTIFACTS

The typical difficulty with gifts of personal property that have some cultural value such as paintings, sculptures and other artifacts is their valuation. Typically, donors seek to purchase items at a low value and then gift them at a significantly higher value to a charity thereby gaining the greatest credit available for a minimal investment. The difficulty is in proving that the increased value is the fair market value for the purposes of the gift.

Where personal property is a "cultural gift" as defined in the ITA, the issue of valuation is largely resolved. Subsection 118.1 (1) defines "total cultural gifts" as follows:

"total cultural gifts" of an individual for a taxation year means the total of all amounts each of which is the fair market value of a gift


(a) of an object that the Canadian Cultural Property Export Review Board has determined meets the criteria set out in paragraphs 29(3)(b) and (c) of the Cultural Property Export and Import Act and
(b) that was made by the individual in the year or in any of the 5 immediately preceding taxation years to an institution or a public authority in Canada that was, at the time the gift was made, designated under subsection 32(2) of the Cultural Property Export and Import Act either generally or for a specified purpose related to that object, to the extent that those amounts were
(c) not deducted in computing the individual's taxable income for a taxation year ending before 1988, and
(d) not included in determining an amount that was deducted under this section in computing the individual's tax payable under this Part for a preceding taxation year;

Recall that the charity to which such property is given must fall within the limited class set out in the definition above in order to qualify for special treatment. The certification provided by the Cultural Property Export Review Board provides a value which is binding upon the Minister for the purposes of the ITA (s. 118.1(10)) and thus the determination of the value of the particular piece of property is resolved.

Donations of cultural property as identified under the Cultural Property Export and Import Act have favourable income tax treatment as compared with other donations to charity. Cultural property donations of up to 100% of taxable income can be utilized in calculating tax credits. In addition there is a tax exemption of capital gains realized from dispositions of cultural properties to designated institutions in addition to the tax credit or deduction that a donor receives (subparagraph 39(1)(a)(i.1). For example, instead of selling a piece of cultural property, incurring the capital gain (66.67% of which is then taxed as regular income) and then using some of the tax credit generated by the donation to offset the tax payable on the capital gain, a donor can give the cultural property directly to the charity and utilize the entire tax credit generated against tax owed on other income. It should be noted that any capital losses suffered as a result of the disposition are deductible within the normal limits. The exemption from capital gains applies both to inter vivos gifts as well as bequests.

F. LAND

As with any other type of property, land can be donated to charity. The same difficulties in valuation apply to land. These difficulties can be more easily resolved where land is involved, however, because of the well established system of assessing land and the fairly active market.

Where land meets the definition of an ecological gift, additional tax benefits apply. "Total ecological gifts" are defined in section 118.1 of the Act as follows:

"total ecological gifts" of an individual for a taxation year means the total of all amounts each of which is the fair market value of a gift (other than if the fair market value of which is included in the total cultural gifts of the individual for the year) of land, including a servitude for the use and benefit of a dominant land, a covenant or an easement, that is certified by the Minister of the Environment, or a person designated by that Minister, to be ecologically sensitive land, the conservation and protection of which is, in the opinion of that Minister, or that person, important to the preservation of Canada's environmental heritage, which gift was made by the individual in the year or in any of the 5 immediately preceding taxation years to
(a) Her Majesty in right of Canada or a province or a municipality in Canada, or
(b) a registered charity one of the main purposes of which is, in the opinion of the Minister of the Environment, the conservation and protection of Canada's environmental heritage, and that is approved by that Minister, or that person, in respect of that gift, to the extent that those amounts were not included in determining an amount that was deducted under this section in computing the individual's tax payable under this Part for a preceding taxation year;

Thus, the subject matter of the gift must be certified by the Minister of Environment to be "ecologically sensitive land", the conservation and preservation of which is, in the opinion of the Minister, important to the preservation of Canada's environmental heritage. As discussed above with respect to whom gifts should be made, gifts of ecological property must be made to Canadian municipalities or to registered charities approved by the Minister having the appropriate objects to receive the benefits accorded to ecological gifts. Subsection 118.1(12) includes valuation rules for easements, covenants and servitudes certified by the Minister, thereby simplifying to a certain extent the valuation of gifts of such property. Like gifts of cultural property, ecological gifts of up to 100% of income can be included in calculating tax credits. However, it should be noted that the taxpayer could be subject to 50% tax based on the fair market value of the gift of property if the recipient disposes of the property or change the use without approval from the Minister.

G. APPRECIATED CAPITAL PROPERTY

Subsection 118.1(6) of the ITA permits an individual gifting appreciated property to choose the disposition value of the gift between the adjusted cost base of the gift and the fair market value of the gift for the purposes of the ITA. Section 118.1(6) reads as follows:

Gift of capital property. Where, at any time, whether by the individual's will or otherwise, an individual makes a gift of
(a) capital property to a donee described in the definition "total charitable gifts", "total Crown gifts" or "total ecological gifts" in subsection (1), or
(b) in the case of an individual who is a non-resident person, real property situated in Canada to a prescribed donee who provides an undertaking, in a form satisfactory to the Minister, to the effect that the property will be held for use in the public interest, and the fair market value of the property at that time exceeds its adjusted cost base to the individual, such amount, not greater than the fair market value and not less than the adjusted cost base to the individual of the property at that time, as the individual or the individual's legal representative designates in the individual's return of income under section 150 for the year in which the gift is made shall, if the making of the gift is proven by filing with the Minister a receipt containing prescribed information, be deemed to be the individual's proceeds of disposition of the property and, for the purposes of subsection (1), the fair market value of the gift made by the individual.

This provision allows a donor to reduce the capital gains to nil if he or she so chooses, but has the consequence of reducing the amount that can be included in total charitable gifts for the purposes of obtaining a tax credit.

This provision is rarely of any use in practice anymore due to the change allowing 100% of gains and recapture to be offset with donation receipts.

H. LIFE INSURANCE

An individual can make a gift of a life insurance policy to a charity. An absolute assignment of a life insurance policy to a registered charity and the designation of the charity as the registered beneficiary of the policy qualifies an individual for the tax credits available with respect to charitable gifts. The value of the gift given where an assignment is made is held by Revenue Canada to be the value of the policy (i.e., the amount by which the cash surrender value of the policy at the time of the absolute assignment exceeds any policy loan outstanding) and any accumulated dividends and interests which are also assigned at the time (IT-44R3). In addition, if the individual continues to pay the premiums for the life insurance, those premiums are also charitable gifts in the year they are made.

As with any gift to charity, for the gift of a life insurance policy to represent a bona fide gift to charity, no right, privilege, benefit or advantage can accrue to the donor as a result of the gift except the income tax relief resulting from the donation. As well, with respect to life insurance, any consents that are required by provincial regulation to be signed to change the beneficiary designation must be signed for there to be a valid charitable gift. Where such an assignment is made, it should also be noted that the assignment may trigger gains.

Where life insurance policies are donated to charitable organizations, it may be appropriate to consider giving a "10 year directed gift". Because section 149.1 of the ITA imposes certain disbursement quota requirements on charities, gifts, such as life insurance, which are not realized until some future date cause administrative difficulties to charities. To circumvent this difficulty, donors can direct that a gift be held for at least ten years. Where this is done, the value of the gift will be exempt from the disbursement quota set out in the ITA (149.1(1)). This enables the charity to accept the gift without having to pay out money which it does not yet have in the year following the year of the gift.

An alternative to assigning the life insurance policy to the charity inter vivos is to appoint the insured's estate as beneficiary and then to include in the will a direction to pay the proceeds to the charity. The difficulty with this approach is that the proceeds will then be subject to wills variation claims as well as probate fees and the claims of the estate's creditors. There is also no immediate income tax credit benefit to the taxpayer where the life insurance proceeds are donated by way of bequest.

IV. HOW AND WHEN TO GIVE?

As discussed briefly above with respect to life insurance, a gift must be a true gift to be eligible for consideration with respect to tax credits under the ITA. There is no definition of "gift" in the ITA, so resort must be had to the common law. As a gift will be considered a true voluntary gift where the property is transferred voluntarily and without valuable consideration, no right, privilege, benefit or advantage can accrue to the donor as a result of the gift.

A. INTER VIVOS VS. POST-MORTEM

Inter vivos gifts have the benefit of providing a tax credit to the individual while the individual is alive. As has been discussed above, individuals can typically claim gifts of up to 75% of their taxable income for the purposes of calculating the credit and in some circumstances up to 100%. Inter vivos donations have immediate benefit both to the individual and to the charity. However, because these gifts are used in calculating tax credits for individuals, they can be carried forward for five more years but they cannot be carried back.

The advantage of a bequest is that under subsections 118.1(4) and (5), 100% of the taxable income of an individual can be given and included in the tax credit calculation in the year of death. In addition, any tax credit not utilized in the year of death can be carried back to the previous year. While bequests are not immediate gifts, and thus neither the individual nor the charity gets the benefit of the bequest immediately, the ultimate tax burden on the estate is reduced while allowing the individual to retain the use of the property in the interim. How each of these planning techniques is used will depend upon the priorities of the particular taxpayer.

B. CHARITABLE REMAINDER TRUSTS

An alternative to either an absolute immediate gift or a bequest is the creation of a charitable remainder trust. With a properly drafted charitable remainder trust, the individual receives the tax benefit of having made the gift immediately while retaining the use of the property donated until some future date. Revenue Canada's position is as follows:

"Where the property donated consists of a residual interest in real property or an equitable interest in a trust, the Department will consider a gift to have been made if all of the requirements listed below are met:
(a) There must be a transfer of property voluntarily given with no expectation of right, privilege, material benefit or advantage to the donor or a person designated by the donor.
(b) The property must vest with the recipient organization at the time of the transfer. A gift is vested if:

(i) the person or persons entitled to the gift are in existence and are ascertained,
(ii) the size of the beneficiary's interests are ascertained, and
(iii) any conditions attached to the gift are satisfied.
(c) The transfer must be irrevocable.
(d) It must be evident that the recipient organization will eventually receive full ownership and possession of the property transferred.

Once it is established that a gift has been made, the value of the gift at the time of the transfer must be determined before it can be claimed for income tax purposes." (IT-226R)

Thus, before a gift via charitable remainder trust will be considered to have been made, there must be a transfer of property appropriate for the type of property involved to the charity. In addition, the transfer must be irrevocable and the charity must eventually receive the entire property. By structuring gifts by way of charitable remainder trust, the donor gets the asset protection (both pre- and post-mortem) created by a trust, the use of the property during his or her lifetime if the trust is so structured, as well as an immediate tax benefit. One type of gift particularly suited to this structure is a gift of a home. The donor can retain the right to live in the home for life, but transfer the remainder interest to the charity.

One difficulty with charitable remainder trusts is the valuation of the gift because it is the remainder interest which must be valued. Where the valuation of the remainder interest given to the charity is not capable of valuation, Revenue Canada will deny the receipt received. The method of valuing a gift will vary depending upon the type of gift made, the age and health of the donor and other factors. Generally, Revenue Canada's approach is to value the various interests taking into consideration the fair market value of the property itself, the current interest rate, the life expectancy of any life tenant, and any other factors relevant to the specific case. The longer the period before full ownership of the property is passed to the charity, the more difficult the valuation becomes. A further drawback to the creation of a trust is that in the absence of an exemption to capital gains treatment (for example where the gift is of cultural property) the transfer to the trustee will be a disposition for the purposes of the ITA and will potentially generate a taxable capital gain in the hands of the donor at the date the trust is settled. Typically, it has been assumed that the gift will constitute a disposition of only the remainder interest, but that conclusion is not clear.

C. LOANBACK

Another method by which donors have typically attempted to retain some portion of their property while making an immediate gift is by way of loanback. This mechanism has been severely hampered by subsection 118.1(16). Subsection 118(16) reads as follows:

(16) Loanbacks. For the purpose of this section, where (a) at any particular time an individual makes a gift of property,
(b) if the property is a non-qualifying security of the individual, the gift is an excepted gift, and
(c) within 60 months after the particular time
(i) the donee holds a non-qualifying security of the individual that was acquired by the donee after the time that is 60 months before the particular time, or
(ii) where the individual and the donee do not deal at arm's length with each other,
(A) the individual or any person or partnership with which the individual does not deal at arm's length uses property of the donee under an agreement that was made or modified after the time that is 60 months before the particular time, and
(B) the property was not used in the carrying on of the donee's charitable activities,
the fair market value of the gift is deemed to be that value otherwise determined minus the total of all amounts each of which is the fair market value of the consideration given by the donee to so acquire a non-qualifying security so held or the fair market value of such a property so used, as the case may be.

The effect of subsection 118.1(16) is that where an individual makes a gift of either a non-qualifying security or an excepted gift and within 60 months after the date of the gift the charity to which the gift was made holds a non-qualifying security of the donor or within 60 months after the date of the gift, the individual uses property of the donee under an agreement made no earlier than 60 months before the date of the gift, the fair market value of the gift made is deemed to be the value less the total fair market value of the consideration given by the charity to the individual for the non-qualifying security held by the charity or the value of the property used by the individual. The gift and non-qualifying security or excepted gift held by the charity or property used by the donor need not be related for this section to apply. An example of the circumstances in which subsection 118.1(16) would apply is where an individual makes a gift of shares to a public foundation and the recipient charity obtains a non-qualifying security by way of a promissory note from the individual within five years thereafter (say, on a buyback). A second example of circumstances in which subsection 118.1(16) would apply is where an individual makes a gift to a non-arm's length recipient charity and the individual or non-arm's length person then uses property of the recipient charity within 5 years thereafter pursuant to an agreement made no earlier than five years prior to the making of the gift where the use of the property is not in the course of the donee's charitable activities. In both above examples, the fair market value of the gift will be reduced for ITA purposes by the value of the consideration paid for the non-qualifying security or the fair market value of the property used. While it is obvious that this section catches those circumstances wherein a donor makes a gift to a charity and then receives a loanback of the same amount of the gift, it also catches circumstances where no such clear abuse of the ITA provisions has occurred.

V. CONCLUSION

What is clear from the above is that with careful planning, a charitable gift can be made to work both for the charity and the donor, and a careful estate planner dealing with a client who has some charitable aspirations will explore the various options available and tax benefits. In choosing the appropriate donee, gift and method of gift, planners must be aware of the goals of the individual donor, the type of property available for donation and the individual's tax status apart from the gift. Charitable vehicles can go along way to reducing the total tax payable by an individual either immediately or upon their death, but the most appropriate goals must be chosen and the most efficient vehicle with the most appropriate subject matter must be used to reach those goals.

These materials were prepared by Nicholas P. Smith and Genevieve N. Taylor, for Lorman Education Services - May 18, 2000.

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