Donation of Flow-Through Shares – subparagraph 38(a.1)(i), subsection 248(35) through (41) and section 237.1
Because of the flow-through nature of the deductions available to a subscriber of a flow-through share, the deemed cost of such shares to the subscriber is nil. With the elimination of capital gains taxes on shares of a public corporation donated to registered charities, the donation of flow-through shares issued by public corporations is an effective way to avoid paying such capital gains taxes that could be very significant on the disposition of flow-through shares. If such flow-through shares are acquired for the sole purpose of gifting them to a registered charity, then the donation of flow-through shares may be an arrangement that technically qualifies as a tax shelter. If a tax shelter is not registered under the Act, then the deductions with respect to that tax shelter may be disallowed.
Question
Since both the flow-through share rules and the rules to eliminate taxable capital gains from charitable donations of shares of public corporations are incentives aimed at encouraging such subscriptions and donations, what is the CRA’s position with regard to whether such donations will be classified as a tax shelter (and subject to the tax shelter registration rules)?
Response
The definition of “tax shelter” in subsection 237.1(1) of the Act includes a “gifting arrangement” which as defined in that subsection means any arrangement under which it may reasonably be considered, having regard to statements or representations made in connection with the arrangement, that if a person were to enter into the arrangement, the person would make a gift to a qualified donee. The exclusion of a flow-through share in paragraph (b) of the definition of “tax shelter” is in reference to the acquisition of a property that is a flow-through share that has not been acquired pursuant to a “gifting arrangement” described in paragraph (b) of that definition.
The purpose of the tax shelter registration rules is to identify the arrangements that fall within the definition of “tax shelter” for review by the CRA. The issuance of an identification number by the CRA is not to be construed as the CRA approving the arrangement. On the other hand, it also does not mean that a subsequent audit will result in adjustments.
The CRA has already issued identification numbers in respect of several flow-through share/donation arrangements and has in fact issued advance income tax rulings on some arrangements. Nevertheless the requirement to obtain a registration identification number allows us to review all such arrangements for compliance with the provisions of the Act.