Non-qualifying security

Guidance

Reference Number
CG-012

Issued
October 19, 2011

This guidance replaces Summary policy CSP-N05, Non-qualifying security.

Summary

When a non-qualifying security is gifted to a qualified donee, the donee can only issue an official donation receipt under very specific circumstances.

The rules regarding non-qualifying securities apply equally to individual and corporate donors.

Non-qualifying security

A non-qualifying security of an individual at a particular time is:

a.  An obligation (other than an obligation of a financial institution to repay deposits with the institution or an obligation listed on a designated stock exchange) of the individual, the individual’s estate, or any person or partnership with which the individual or the individual’s estate does not deal at arm’s length immediately after that time

b.  A share of a corporation (other than a share listed on a designated stock exchange) with which the individual, or the individual’s estate, or when the individual is a trust, a person affiliated with the trust, does not deal at arm’s length immediately after that time

(b.1) A beneficial interest of the individual or the estate in a trust that

       (i) immediately after that time is affiliated (within the meaning of s. 251.1 of the Income Tax Act) with the individual or the individual’s estate

      (ii) holds, immediately after that time, a non-qualifying security of the individual or the individual’s estate, or held, at or before that time, a share described in (b) that is, after that time, held by the donee

c.  Any other security (other than a security listed on a designated stock exchange) issued by the individual, the individual’s estate, or by any person or partnership with which the individual or estate does not deal at arm’s length (or when the person is a trust, with which the individual or estate is affiliated) immediately after that time

Issuing Official Donation Receipts

A qualified donee can only issue an official donation receipt to the donor of a non-qualifying security if the security is an excepted gift or, if within 60 months of acquiring the non-qualifying security, one of the following two conditions applies:

1. the security ceases to be a non-qualifying security (i.e., a privately held company goes public and its shares become listed on a designated stock exchange)
2. the qualified donee disposes of the non-qualifying security

The 2011 Federal Budget contains a proposed change to the second condition. Specifically, when a qualified donee disposes of a non-qualifying security, an official donation receipt may only be issued when the disposition is for consideration that is not another non-qualifying security of any person. This provision takes effect for dispositions on or after March 22, 2011.

A non-qualifying security is considered to be an excepted gift if it meets all of the following criteria:

• it is in the form of a share
• the donee that receives the non-qualifying security is not a private foundation
• the donor deals at arm's length with the donee
• when the donee is a charitable organization or a public foundation, the donor deals at arm's length with each of the charity's directors, trustees, officers, and like officials

Commentary

When the non-qualifying security rules apply, the gift is considered to have been made at the time the property ceased to be a non-qualifying security, or when it is disposed of by the donee. For purposes of determining the fair market value of the gift:

• when a qualified donee disposes of a non-qualifying security at any time in the 60-month period after it received the gift, the fair market value of the property will be deemed to be the lesser of the amount determined to be its fair market value at the time of the gift, and the fair market value of the consideration (other than a non-qualifying security of the donor – also see the Budget 2011 proposed amendment described above) received by the donee at the time of disposition
• when a property ceases to be a non-qualifying security at any time in the 60-month period after the time of the gift, the fair market value of the property will be deemed to be the lesser of its fair market value at the time of the gift, and its fair market value at the time it ceased to be a non-qualifying security

Budget 2011 has also introduced an anti-avoidance measure that may impact the tax recognition of a gift when, as a result of a series of transactions, a particular person holds a non-qualifying security of a donor and the donee has acquired, directly or indirectly, a non-qualifying security of the particular person or of the donor. In such situations, the donor’s gift will be subject to the non-qualifying security rules until such time (within 60 months of the donation) that the donee has disposed of the non-qualifying security for consideration that is not, to any person, another non-qualifying security. This provision takes effect for dispositions by qualified donees on or after March 22, 2011.

References

• Income Tax Act, R.S.C. 1985 (5^th supp.) c. 1, ss. 110.1(6), 118.1(13), (14), (15), (18) and (19).