The Tax Court of Canada decision in Odette (Estate) v the Queen[1] demonstrates two equally important principles. The first is the need to carefully review 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 deadline.
In Odette, the testator, who died on November 17, 2012, left the residue of his estate, including all of the shares of a private company, to his private foundation. The value of the private company shares was over $17 million dollars.
Under subsection 118.1(13) ITA, private company shares when donated to a private foundation are non-qualifying securities (“NQS”), which means that the donation is deemed not to occur until such time as the shares are no longer NQS within 60-months after the donation. One way to achieve this is for the shares to be redeemed or purchased for cancellation upon the liquidation and wind-up of the company. This appears to be what the estate executors intended to do. But timing is everything in order to achieve the benefit when dealing with gifts by will. Under 118.1(5) ITA, a gift by will to a charity will only result in a charitable donation receipt when the property in question is actually transferred to the charity. So if property is only transferred to the charity after the terminal return must be filed, then the estate will have to pay tax on the deemed disposition triggered by death, pursuant to subsection 70(5) ITA. When the charitable donation receipt is subsequently issued, the terminal return can be amended claiming the charitable tax credit and requesting a refund. Given the value of the donation and the significant tax liability, it was certainly in the interest of the estate to get the charitable donation receipt as quickly as possible.
Mr Justice Rossiter found that on December 20, 2013 the estate began implementing a tax plan to complete the transfer of the shares to the charity and to have the shares purchased for cancellation. On December 23, 2013, the shares were purchased for cancellation by the private company. The purchase was satisfied by the delivery of a non-interest bearing demand promissory note issued by the corporation in the amount of $17,710,000. The note was fully paid by August 6, 2014. The estate filed a T1 terminal return for the 2012 taxation year on May 17, 2013 in which it used the charitable donation receipt resulting from the donation of the shares.
The Minister found that as the note in question was itself a NQS under subsection 118.1(18) ITA, the technical requirements of paragraph 118.1(13)(c) ITA were not met to permit the gift to be recognized. Essentially, paragraph 118.1(13)(c) ITA provides, in part, that if the security is disposed of by the charity within 60 months of the gift, the donor will be deemed to have made the gift and the fair market value of the gift is deemed, essentially, to be the fair market value of any consideration received at the time of the disposition other than if a NQS is the consideration. Even though the note was eventually paid with cash, paragraph 118.1(13)(c) ITA requires the consideration that is not a NQS to be received at the time of the disposition. Thus, as consideration received for the shares was nil, no charitable donation receipt was available to the estate and the estate had a significant tax liability from the deemed disposition of the shares. Given the value of the shares was over $17 million, the impact on the estate and the heirs is significant!
This decision provides a valuable lesson for tax planners. First, care must always be taken when reading provisions of the ITA to ensure compliance, otherwise the impact can be devastating. Second, while we do not have the complete portrait of all of the facts, we recommend careful consideration when being asked to develop an estate plan late in the year that need to be implemented prior to year-end, as preparing one under time pressures may lead to unintended and undesired results.
[1] 2021 TCC 65 (CanLII).
