Bill C-240: An Act to amend the Income Tax Act (donations involving private corporation shares or real estate)

R.S., c. 1 (5th Supp.) Income Tax Act 1 (1) Paragraph 38(a) of the Income Tax Act is replaced by the following: (a) subject to paragraphs (a.1) to (a.4) , a taxpayer’s taxable capital gain for a taxation year from the disposition of any property is ½ of the taxpayer’s capital gain for the year from the disposition of the property; (2) The Act is amended by adding the following after paragraph 38(a.3): (a.4) a taxpayer’s taxable capital gain for a taxation year from the disposition of a property is equal to zero if (i) the following conditions are met: (A) subsection 38.4(1) applies to the disposition, (B) an amount of money is the subject of a gift that is made by the taxpayer to a qualified donee not more than 30 days after the disposition, and (C) the taxpayer is resident in Canada at the end of the taxation year, or (ii) the following conditions are met: (A) the taxpayer was resident in Canada immediately before the taxpayer’s death, (B) the disposition is deemed by section 70 to have occurred, (C) subsection 38.4(1) applies to the subsequent disposition of the property by the taxpayer’s graduated rate estate, and (D) an amount of money is the subject of a gift to which subsection 118.1(5.1) applies and that is made by the estate to a qualified donee not more than 30 days after the subsequent disposition; 2 The Act is amended by adding the following after section 38.2: Allocation of gain — paragraph 38(a.4) 38.3 If subsection 38.4(1) applies to a taxpayer’s disposition of a property in a taxation year, (a) where the conditions in subparagraph 38(a.4)(i) are met in respect of the taxpayer’s disposition, (i) paragraph 38(a.4) applies only to the portion of the taxpayer’s capital gain on the disposition that is determined by the formula A × (B – C)/D where A is the taxpayer’s capital gain from the disposition, B is the lesser of (A) the total amount of money that is the subject of a gift to a qualified donee that is (I) made by the taxpayer within 30 days after the disposition, and (II) designated by the taxpayer as a gift in respect of which paragraph 38(a.4) applies in the taxpayer’s return of income for the taxation year, and (B) the amount of money received by the taxpayer, as proceeds from the disposition, prior to the making of the gift, C is the amount of the advantage, if any, in respect of the gift, and D is the taxpayer’s proceeds of disposition of the property, and (ii) paragraph 38(a) applies to the extent that the taxpayer’s capital gain from the disposition exceeds the amount determined by the formula in subparagraph (i); and (b) where the taxpayer is the estate of an individual and the conditions in clauses 38(a.4)(ii)(C) and (D) are met in respect of the disposition (in this paragraph referred to as the “subsequent disposition”), (i) paragraph 38(a.4) applies only to the portion of the individual’s capital gain from the individual’s disposition, under section 70, of the property that is determined by the formula A × (B – C)/D where A is the individual’s capital gain from the disposition, under section 70, of the property, B is the lesser of (A) the total amount of money that is the subject of a gift to a qualified donee that is (I) made by the estate within 30 days after the subsequent disposition, and (II) designated by the individual's legal representative as a gift in respect of which paragraph 38(a.4) applies in the individual’s return of income for the individual’s taxation year in which the death occurred, and (B) the amount of money received by the individual’s estate, as proceeds from the subsequent disposition, prior to the making of the gift, C is the amount of the advantage, if any, in respect of the gift, and D is the estate’s proceeds of the subsequent disposition, and (ii) paragraph 38(a) applies to the extent that the individual’s capital gain from the disposition, under section 70, of the property exceeds the amount determined by the formula in subparagraph (i). Application of paragraph 38(a.4) 38.4 (1) This subsection applies to a taxpayer’s disposition of a property in a taxation year if (a) the property is (i) a share of the capital stock of a private corporation, or (ii) real or immovable property situated in Canada; (b) the disposition (i) occurs after 2021, (ii) is a sale to a person or partnership, and (iii) is not a transaction and is not part of a series of transactions or events (A) under which the purchaser is not dealing at arm’s length or is affiliated with (I) the taxpayer, or (II) the qualified donee to which a gift, described in subparagraph 38(a.4)(i) or (ii), is made in connection with the disposition, or (B) that includes one or more agreements or other arrangements that (I) are entered into by the taxpayer or by a person or partnership that does not deal at arm’s length with, or that is affiliated with, the taxpayer, (II) have the effect, or would have the effect if entered into by the taxpayer instead of the person or partnership, of providing to the taxpayer all or any portion of the risk of loss or opportunity for gain or profit in respect of the property for a definite or indefinite period of time, and (III) can reasonably be considered to have been entered into, in whole or in part, with the purpose of avoiding the application of clause (A); and (c) it is not the case that (i) the taxpayer (or a person or partnership with which the taxpayer is not dealing at arm’s length or is affiliated) or the qualified donee (or a person or partnership with which the qualified donee is not dealing at arm’s length or is affiliated) acquires in the taxation year, directly or indirectly, all or any portion of (A) the property, (B) property substituted for the property, or (C) property that derives its value from the property, (ii) if the property is a share of the capital stock of a corporation, that share, or a share substituted for it, is redeemed, acquired or cancelled in the taxation year at a time when the taxpayer, a person or partnership not dealing at arm’s length with the taxpayer or the taxpayer’s estate (if applicable) does not deal at arm’s length or is affiliated with the corporation, or (iii) subsection 118.1(16) applies in the taxation year to determine the fair market value of a gift made in the taxation year described in clause (A) of the description of B in subparagraph 38.3(a)(i). Reversal of capital gain exemption (2) If this subsection applies to a taxpayer for a particular taxation year in respect of a particular disposition of the property to which subsection (1) applied in any preceding taxation year, then the taxpayer is deemed to have a capital gain from a disposition in the particular taxation year of the property equal to the portion of the capital gain on the disposition to which paragraph 38(a.4) applied. Application of subsection (2) (3) Subsection (2) applies to a taxpayer for a particular taxation year in respect of a disposition of property by the taxpayer to which subsection (1) applied in any preceding taxation year if, after the end of the preceding taxation year and on or before the date that is 60 months after the time of the disposition, (a) the taxpayer (or a person or partnership with which the taxpayer is not dealing at arm’s length or is affiliated) or the qualified donee (or a person or partnership with which the qualified donee is not dealing at arm’s length or is affiliated) acquires in the particular taxation year, directly or indirectly, all or any portion of (i) the property, (ii) property substituted for the property, or (iii) property that derives its value from the property; (b) if the property is a share of the capital stock of a corporation, that share, or a share substituted for it, is redeemed, acquired or cancelled in the particular taxation year at a time when the taxpayer, a person or partnership not dealing at arm’s length with the taxpayer or the taxpayer’s estate (if applicable) does not deal at arm’s length or is affiliated with the corporation; or (c) subsection 118.1(16) applies in the particular taxation year to determine the fair market value of a gift — made in the particular taxation year or a previous taxation year — described in clause (A) of the description of B in subparagraph 38.3(a)(i). Taxpayer ceasing to exist (4) Subsection (2) applies at a particular time in a particular taxation year to a particular taxpayer in respect of a disposition of property by another taxpayer to which subsection (1) applied in any preceding taxation year if (a) the other taxpayer ceased to exist before the particular time; (b) the particular taxpayer (i) was not dealing at arm’s length or was affiliated with the other taxpayer immediately before the other taxpayer ceased to exist, or (ii) at the particular time was not dealing at arm’s length with or was affiliated with a person or partnership that was not dealing at arm’s length or was affiliated with the other taxpayer immediately before the other taxpayer ceased to exist; and (c) after the end of the preceding taxation year and on or before the date that is 60 months after the time of the disposition, (i) the particular taxpayer acquires in the particular taxation year, directly or indirectly, all or any portion of (A) the property, (B) property substituted for the property, or (C) property that derives its value from the property, (ii) if the property is a share of the capital stock of a corporation, that share, or a share substituted for it, is redeemed, acquired or cancelled in the particular taxation year at a time when the particular taxpayer or the particular taxpayer’s estate (if applicable) (A) does not deal at arm’s length or is affiliated with the corporation, and (B) holds, directly or indirectly, an interest in the corporation, or (iii) if subsection 118.1(16) applies in the particular taxation year to determine the fair market value of a gift — made in the particular taxation year or a previous taxation year — described in clause (A) of the description of B in subparagraph 38.3(a)(i) and the particular taxpayer uses property in circumstances described in subparagraph 118.1(16)(c)(ii). Deemed excess (5) For the purposes of subsection 161(1), if an amount is deemed to be a capital gain of a taxpayer for a particular taxation year under subsection (2), the taxpayer is deemed to have an excess immediately after the taxpayer’s balance-due day for the year computed as if (a) the taxpayer were resident in Canada throughout the year; (b) the taxpayer’s tax payable for the year were equal to the tax payable by the taxpayer on its taxable income for the year; (c) the amount were the taxpayer’s only taxable income for the year; (d) the taxpayer claimed no deductions under Division E for the year; (e) the taxpayer had not paid any amounts on account of its tax payable for the year; and (f) the tax payable determined under paragraph (b) had been outstanding throughout the period that begins immediately after the end of the preceding taxation year referred to in subsection (2) and that ends on the taxpayer’s balance-due day for the particular year. 3 The portion of subsection 40(12) of the Act before paragraph (a) is replaced by the following: Donated flow-through shares (12) If at any time a taxpayer disposes of one or more capital properties that are included in a flow-through share class of property and paragraph 38(a.1) or (a.4) applies to the disposition (in this subsection referred to as the “actual disposition”), then the taxpayer is deemed to have a capital gain from a disposition at that time of another capital property equal to the lesser of 4 Clause 53(1)(e)(i)(A) of the Act is replaced by the following: (A) paragraphs 38(a.1) to (a.4) and the fractions set out in paragraph 38(a) and subsection 41(1), 5 Sections 1 to 4 apply to the 2022 and subsequent taxation years.