The decision of the Canadian Finance Court in Odette (Estate) against the Queen shows two equally important principles. The first is the need to carefully review the complex provisions of the Income Tax Act (Canada) (the “ITA“) When developing a tax plan. The second is the dangers of developing and implementing tax planning in a short period of time.
In Odette, the deceased of his private foundation, who died on November 17, 2012, left the remainder of his estate, including all shares in a private company. The value of the company’s private shares was over $ 17 million.
According to subsection 118.1 (13) ITA, private company shares when donated to a private foundation are not qualifying securities (“if“), Which means that the donation is only considered to have been made if the shares are no longer NQS within 60 months of the donation. This can be achieved, among other things, by withdrawing the shares or buying them for destruction upon liquidation and liquidation of the company. This appears to be the intention of the administrators. But timing is everything to get the benefit in will handling. According to 118.1 (5) ITA, a voluntary donation to a charity will only result in a donation receipt if the property in question is actually transferred to the charity. So if property is only transferred to the charity after the final return has been submitted, the estate must pay taxes on the alleged death-triggered disposition in accordance with Section 70 (5) of the Income Tax Act. If the donation receipt is subsequently issued, the terminal reimbursement can be changed using the donation receipt and reimbursement of donations. Given the value of the donation and the considerable tax burden, it was certainly in the interest of the estate to receive the donation receipt as soon as possible.
Mr. Justice Rossiter noted that the estate began executing a tax plan on December 20, 2013 to complete the transfer of the shares to the charity and have the shares purchased for redemption. On December 23, 2013, the shares were acquired by the private company for redemption. The purchase was satisfied by the delivery of a non-interest bearing note from the company for $ 17,710,000. The promissory note was paid in full by August 6, 2014. The estate submitted a T1 final declaration for the 2012 tax year on May 17, 2013, using the donation receipt resulting from the donation of the shares.
The Minister noted that since the note in question was itself an NQS under subsection 118.1 (18) ITA, the technical requirements of section 118.1 (13) (c) ITA were not met to allow recognition of the gift. In essence, Section 118.1 (13) (c) ITA provides that if the security is sold by the charity within 60 months of the gift being donated, the donor will be deemed to have made the gift and the gift will be deemed to have been given the fair market value essentially as the fair value of a consideration received at the time of the sale, unless it is an NQS. Even if the note was ultimately paid in cash, Section 118.1 (13) (c) ITA requires that the non-NQS consideration be received at the time of the disposition. Since the consideration for the shares was zero, no donation receipt was available for the estate, and the estate was subject to significant tax liability on the presumed sale of the shares. Given the value of the shares at over $ 17 million, the impact on the estate and heirs is significant!
This decision is a valuable lesson for tax planners. First, care must always be taken when reading the provisions of the ITA to ensure that they are followed or the effects can be devastating. Second, while we don’t have the full portrait of all the facts, we recommend careful consideration when asked late in the year to develop an inheritance plan that needs to be implemented before the end of the year, as preparing one under time pressures can lead to unintended and undesirable results .