There is often confusion in the charity sector about donations of marketable securities vs. donations of private company shares in Canada. There is a huge difference in complexity between the two different transactions, although many charity gift acceptance policies that we review don’t seem to fully grapple with the differences. Donations of marketable securities are almost always straightforward except in unusual cases such as where marketable securities are thinly traded public securities or if there is a requirement that the charity not sell the shares for a period of time.
Donations of private company shares on the other hand are much more complicated and especially if they are going to a private foundation.
In the Odette case, it deals with Mr. Odette dying in 2012 and as part of an estate plan about $17 million in shares of Mr. Odette’s private company were donated to a private foundation. The court notes that “The private foundation then disposed of the shares to Mr. Odette’s company in exchange for a promissory note of that company. The company made corresponding cash payments within approximately eight months of the disposition.”
The key issue was a review of section 118.1(13)(c) of the Income Tax Act and whether the phrase “any consideration” includes a promissory note.
The court decided that it did not and rejected the official donation receipt even though the estate had actually later made cash payments to the private foundation of $17 million. The case is quite interesting as it discusses at length statutory interpretation relating to the Income Tax Act.
The judge noted:
I find that a textual, contextual purposeful analysis of paragraph 118.1(13)(c) of the Act indicates that the term “any consideration” is limited. The consideration must be received at the time of the disposition and it must not be a non-qualifying security. I find that the only consideration received for the disposition of the shares was the promissory note. Since the promissory notes was between non-arm’s length parties, it is a non-qualifying security. Thus, paragraph 118.1(13)(c) deems the fair market value of the shares to be nil and the Appellant is not entitled to the charitable donation tax credit.
The judge noted in conclusion:
The term “consideration” in paragraph 118.1(13)(c) has limitations. Parliament intended that consideration in this redemptive provision be limited to consideration that is received at the time of the disposition and that is not a non-qualifying security. In this case, the Promissory Note was the only consideration received at the time of the disposition. Since the Promissory Note is a promissory note between non-arm’s length parties, it is a non-qualifying security. Thus, the fair market value of the gift is nil. The appeal is therefore dismissed with costs in favour of the Respondent.
Here is the full text of the case Odette v. Queen,