TaxMatters@EY – February 2021

Krista Fox and Alan Roth, Toronto

To encourage the transfer of cultural objects to organizations that preserve such property and make them accessible to the public, the Income Tax Act (the Act) provides preferential tax treatment for donations of cultural property made to designated Canadian institutions or public authorities¹ and certified by the Canadian Cultural Property Export Review Board (CCPERB).

In a recent technical interpretation,² the Canada Revenue Agency (CRA) was asked to address the potential tax implications resulting from a delay in the required certification of cultural property by the CCPERB or in the issue of a donation receipt by a designated Canadian institution or public authority.

Background

Any capital gain realized on an object donated to a designated³ Canadian institution or public authority and certified as cultural property by the CCPERB is exempt from tax under subparagraph 39(1)(a)(i.1) of the Act, although capital losses remain deductible, subject to the usual rules.⁴

Donations of certified cultural property are also eligible for a tax deduction under section 110.1 of the Act in the case of corporate donors, or a non-refundable tax credit under section 118.1 of the Act in the case of non-corporate donors, based on the eligible amount of the property. The eligible amount of the gift is calculated on the basis of the property’s fair market value, as determined by the CCPERB, less the amount of any advantage received in respect of the gift. An advantage is any benefit (e.g., property or services) the donor receives from the recipient in return for making the gift. In addition, the general limitation on the amount of charitable donations that an individual can claim in a taxation year (i.e., 75% of the individual’s net income in the taxation year) does not apply with respect to gifts of certified cultural property. The tax deduction or credit can be claimed in the year the property is donated, or in any of the five taxation years immediately following that year.

According to the CCPERB website, an object will only be certified as cultural property if the applicant can justify that it is of outstanding significance due to its close association with Canadian history or national life, its aesthetic qualities, or its value in the study of the arts or sciences.⁵

Examples of cultural property include:

• Archaeological objects, fossils and minerals
• Ethnographic material culture (including Aboriginal, Métis and Inuit objects)
• Military objects
• Applied and decorative art
• Fine art
• Scientific or technological objects
• Archival material (e.g., maps, sound recordings, photographs, films and documents)
• Audiovisual collections.

The application for certification is made by the designated institution or public authority on behalf of the donor (or vendor). The CCPERB can approve or refuse an application, or place it on hold if, for example, additional information is required of the applicant. If an application is approved, a certificate (Form T871, Cultural property income tax certificate) will be issued to the donor based on the object’s fair market value.

Once the CCPERB has issued certification, a donation receipt may be issued to the donor by the designated institution or public authority using the fair market value from the certificate to prepare the donation receipt. The receipt must also include the information prescribed under Part XXXV (Receipts for Donations and Gifts) of the Income Tax Regulations.

Due to the length and complexity of the CCPERB’s certification process, the issuance of certificates and receipts may sometimes be subject to delays of up to several years from the time a donation is made.

CRA comments

In its technical interpretation, the CRA was asked whether there was a specific time period within which a designated institution or public authority is required to issue a donation receipt after receiving a gift of cultural property, and what the potential tax implications to donors are if the required CCPERB certification of the property and donation receipt is not issued until several years after the donation is made.

The CRA confirmed that a donation receipt is not required to be issued by a designated institution or public authority within any specific timeframe after receiving the gift. However, the CRA also acknowledged that the donor cannot claim a deduction or tax credit unless the donation is supported by both the receipt and the CCPERB certification. Therefore, a donor that receives a CCPERB certificate and donation receipt after filing their tax return for the taxation year in which the gift was made must request that the CRA reassess their tax return for the year in which the gift was made to claim the deduction or credit and capital gain exclusion, if applicable. This CRA position is consistent with a recent course case (see Yellow Point Lodge Ltd. v. Canada article below) where the court confirmed that a gift is considered to be made in the year the gifted property is disposed of or transferred (and not in a subsequent year when the certification process is completed).

The CRA also commented that the statutory limits of the normal assessment or reassessment period⁶ are not applicable since subsection 118.1(11) of the Act allows the CRA to make an assessment or reassessment for any taxation year to give effect to the issuance of a CCPERB certificate. In the CRA’s view, in giving effect to the CCPERB certificate, such an assessment or reassessment will generally take into account the capital gain exclusion, if applicable, and the tax deduction or non-refundable tax credit, provided the donor has also received a donation receipt.

Only the CCPERB certificate is required for the capital gain exclusion to apply. If the CCPERB determines that the property cannot be certified as cultural property and does not issue a certificate, the capital gain exclusion will not be available. However, the CRA noted that in these circumstances, the gifted property could still be considered a charitable gift of property (other than cultural property) in the year the property was gifted, provided the institution or public authority is a qualified donee under subsection 149.1(1) of the Act, a donation receipt is issued with the prescribed information, and the taxation year that the gift was made can still be assessed or reassessed within the Act’s statutory limits at the donor’s request. Further, the minister does have the discretion to allow an assessment or reassessment after the normal reassessment period in limited circumstances (e.g., where a taxpayer files a waiver, generally within the normal reassessment period, or under the taxpayer relief measures).

Conclusion

While the Income Tax Act provides incentives for the donation of certified cultural property to designated Canadian institutions and public authorities, certification requirements and receipting can sometimes result in long delays for donors being able to benefit from these incentives. Such delays may result in cash flow issues for the donor since either the donation deduction or credit, and the exclusion from taxation on any capital gain realized on the donation, will in turn be delayed. To reduce delays in the certification process, donors should strive to provide accurate and complete information on the property to the designated institutions or public authorities receiving the donation and applying for certification from the CCPERB.

Lucie Champagne, Alan Roth, Andrew Rosner and Candra Anttila, Toronto

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Winnie Szeto, Toronto; Gael Melville, Vancouver

In this case, the Federal Court of Appeal (FCA) confirmed that an ecological gift was made in the year the gifted property was disposed of, and not when all the requirements for claiming a tax deduction under paragraph 110.1(1)(d) of the Income Tax Act¹ (the Act) were fulfilled. In this particular case, the taxpayer would have been able to deduct over $1 million more of the ecological gift as a donation if the FCA had found in its favour.

Facts

The appellant was a corporation that was the registered owner of certain lands in British Columbia. The lands were mainly undeveloped and in their natural state except for a lodge and cabin resort.

On June 6, 2008, the appellant granted a covenant with respect to a parcel of ecologically sensitive land located on the eastern portion of the lands, 50% of which was granted to Donee 1 and 50% of which was granted to Donee 2. The covenant had a fair market value of approximately $5.8 million at the time.

To claim a deduction under paragraph 110.1(1)(d) for the gift of the covenant, the appellant was required to obtain the following documents:

• A Statement of Fair Market Value of an Ecological Gift Pursuant to the Income Tax Act of Canada from the federal Minister of the Environment
• A Certificate of Ecologically Sensitive Land, Receipt Identification, and Registered Charity Approval Pursuant to the Income Tax Act of Canada from the federal Minister of the Environment
• A donation tax receipt from each of the donees

The appellant did not claim the deduction when it filed its income tax return for its taxation year ended December 31, 2008 because it had not at that time obtained the required documents.

In December 2009, the federal Minister of the Environment issued to the appellant the fair market value statement and the Certificate of Ecologically Sensitive Land. In February 2010, each of the donees issued a tax receipt to the appellant in the amount of approximately $2.9 million, representing the value of the gift.

In May 2010, the appellant requested that the Minister of National Revenue reassess the appellant’s 2008 taxation year to allow it to claim a deduction under paragraph 110.1(1)(d) of $382,779 with respect to its gift made in 2008. In July 2010, the Minister reassessed the appellant’s 2008 taxation year and allowed the deduction of $382,779. The effect of this deduction, among other things, was to reduce the appellant’s 2008 taxable income to nil. The appellant did not subsequently request that the Minister remove this deduction from income with respect to the gift.

In its 2009 to 2013 taxation years, the appellant also claimed deductions from income under paragraph 110.1(1)(d) with respect to its gift totalling around $2.45 million. As a result, the amount that remained unclaimed after its 2013 taxation year was $3 million.

In filing its 2014 tax return, the appellant claimed a further deduction of around $1.6 million under paragraph 110.1(1)(d) with respect to its gift. On assessment, the Minister disallowed the deduction on the basis that the gift was made in 2008, and therefore the appellant was not allowed to claim a deduction in its 2014 taxation year since it was outside the five-year carryforward period as it then read.²

The appellant objected to the assessment and the Minister confirmed it. The appellant then appealed the assessment to the Tax Court of Canada on the basis that the 2008 deduction was not valid, the five-year carryforward period allowed under paragraph 110.1(1)(d) did not start until 2009 when the certificates were issued and, as a result, the five-year carryforward period ended with the appellant’s 2014 taxation year.

The Tax Court decision

For gifts made in 2008 and 2009, paragraph 110.1(1)(d) provided that an amount in respect of ecological gifts may be deducted if “the gift was made by the corporation in the year or in any of the five preceding taxation years…”. [emphasis added]

At trial, the appellant argued that the gift was made in 2009 when all the requirements for making an ecological gift under paragraph 110.1(1)(d) were completed (i.e., when the Minister of the Environment issued the certificates in December 2009). The Crown argued that the gift was made in 2008 when the covenant was legally granted by the appellant to the donees.

At the outset, the Tax Court judge sought to determine whether a gift had been made. He first noted that there was no statutory definition of “gift.” He then adopted the meaning as set out, for example, in The Queen v Berg: “… a gift is a voluntary transfer of property owned by a donor to a [donee] in return for which no benefit or consideration flows to the donor.”³ Relying on this definition, the Tax Court judge concluded that the gift was made when the appellant granted the covenant to the donees on June 6, 2008.

The Tax Court judge was of the view that each of the criteria set out in paragraph 110.1(1)(d) were separate and were not part of the determination of when a gift was made. He noted that “… this interpretation [was] supported by both the text of paragraph 110.1(1)(d) and the context of the Act read as a whole.” He went on to explain how paragraph 110.1(1)(d) and other provisions⁴ of the Act were either clear or suggested that the “making of the gift” was an event separate from the process of obtaining the required certificates.

The Tax Court judge concluded that the gift was made when it was legally effected — that is, when the covenant was granted — and the making of the gift was unequivocally separate from the other requirements that must be met for the deduction to be allowed. Accordingly, the appellant was allowed to claim the deduction in its 2008 through 2013 taxation years but not in its 2014 taxation year, which fell outside the carryforward period.

The FCA decision

At the FCA, the only issue was whether the Tax Court judge erred in concluding that the ecological gift was made in 2008 when the property was disposed of, rather than in 2009 when the requirements to claim a deduction under paragraph 110.1(1)(d) were fulfilled. The FCA noted that this was solely a question of statutory construction and was to be assessed on a standard of correctness.

The FCA indicated that it was generally accepted that under common law or civil law, a disposition occurs when a gifted property was transferred from a donor to a donee. While the appellant did not disagree with this statement, they argued that paragraph 110.1(1)(d) carved out an exception to this general rule because the words “gift was made” in paragraph 110.1(1)(d) were ambiguous. The appellant maintained that a purposive analysis of paragraph 110.1(1)(d) would show that the gift was not made until 2009 when the certificates were issued.

The FCA agreed with the Tax Court that when a gift was made and when a gift qualifies for a deduction under the Act were separate and distinct questions. The FCA was of the view that paragraph 38(a.2) fully answered the question as to when a gift was made for purposes of paragraph 110.1(1)(d). That paragraph provides that “the disposition is the making of a gift.”⁵ In addition, subparagraph 69(1)(b)(ii) speaks of a disposition “by way of gift inter vivos.”⁶ The FCA was of the view that these provisions were not ambiguous and that the gift and disposition occurred at the same time when ownership of the gifted property was transferred from the donor to the donee under the applicable private law.

The Tax Court judge held that the stipulated process under subsection 118.1(11) ensured that a taxpayer can claim a deduction in the year in which the gift was made and in the five subsequent years, even if there are delays in the final determination of the gift’s fair market value. The appellant argued that the Tax Court judge erred because the French text of subsection 118.1(11) used the word “peut,” which means “may,” as opposed to the English text which used the word “shall.” The appellant argued that the two versions were inconsistent and that the French text better reflects Parliament’s intent.

The FCA disagreed with the appellant, stating that while the permissive word “peut” (“may”) and the obligatory word “shall” appear to be inconsistent on their own, there was no inconsistency in this case. The FCA stated that it reached this conclusion because the provisions of the Act that allow a taxpayer to challenge a fair market value certificate make it clear that the certificate must be given effect by way of assessment or reassessment. As a result, the FCA was of the view that the Tax Court judge made no error in this respect.

Based on the above, the appeal was dismissed.

Lessons learned

This case serves to remind taxpayers that for purposes of paragraph 110.1(1)(d), an ecological gift is made in the year of the disposition, not in a subsequent year when all the requirements for a deduction are fulfilled. As a result, taxpayers should be mindful in their gift planning that the carryforward period begins the year following the taxation year when the property that is the subject of the ecological gift is disposed of.

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