$17 Million Gift to Private Foundation Ineligible for Tax Credit
Oct 2021 Charity & NFP Law Update
Published on October 28, 2021

By Terrance S. Carter and Ryan M. Prendergast


The Tax Court of Canada decision in Odette (Estate) v the Queen demonstrates the importance of being fully aware of the particular requirements regarding gifts to private foundations of non-qualifying securities (“NQS” as explained further below). The Tax Court of Canada decision, published on September 28, 2021, dismissed an appeal by the taxpayer from an assessment made under the ITA for the 2012 taxation year which denied the taxpayer a charitable donation tax credit.

The Estate of the Late Edmond G. Odette (the “Taxpayer”) was the sole shareholder of Edmette Holdings Ltd. (the “Corporation”). Mr. Odette’s wills left the residue of the Taxpayer estate, including all of the shares of the Corporation, to the E & G Odette Foundation (the “Foundation”), a private foundation not at arm’s length from the Corporation. The Taxpayer obtained advice about how to transfer the shares of the Corporation to the Foundation and, based on that advice, entered into a series of transactions. First, on December 20, 2013, the Taxpayer transferred the shares to the Foundation as a gift, recognizing it was an NQS. Then, on December 23, 2013, the Foundation disposed of the shares to the Corporation for cancellation by accepting a non-interest bearing promissory note back from the Corporation as payment for the shares. Finally, the Corporation made three cash payments totaling over $17 million dollars to the Foundation between April and August 2014 in satisfaction of the promissory note.

The only issue for the court to consider was whether the Taxpayer was entitled to a charitable donation tax credit for the deemed value of the shares it transferred to the Foundation, as per paragraph 118.1(13)(c) of the ITA dealing with NQS, which states:

(13) … if at any particular time an individual makes a gift … of a non-qualifying security of the individual …,

(c) if the security is disposed of by the donee within 60 months after the particular time … the individual is deemed to have made a gift to the donee of property at the time of the disposition and the fair market value of that property is deemed to be the lesser of the fair market value of any consideration (other than a non-qualifying security of any person) received by the donee for the disposition and the fair market value of the security at the particular time …

Generally, when NQSs are gifted to a private foundation, then a taxpayer cannot claim a donation tax credit (per paragraph 118.1(13)(a)) unless the security ceases to be an NQS within five years, or unless and until the private foundation disposes of the shares, provided it does so within five years (118.1(13)(c)). In this case, all parties agreed that the private shares of the Corporation were an NQS. The Minister of National Revenue (the “Minister”) argued that when the Foundation disposed of the shares, it did so only for the consideration in the form of the non-interest bearing promissory note. The Minister further argued that Parliament did not intend to grant a donation tax credit at the time the promissory note was received because the charity was not yet enriched and the donor not yet impoverished.

In a textual, contextual and purposive analysis of paragraph 118.1(13)(c), the court focused on what the word “consideration” means, especially in the context of phrases such as “consideration received” and “at the time of the disposition.” On the facts, the Foundation disposed of the shares on December 23, 2013 in exchange for a promissory note, but only received the cash payments approximately eight months later. The court noted that the wording in paragraph 118.1(13)(c) indicated that any consideration needed to be received on December 23, 2013, since that was “the time of the disposition.” If Parliament had meant to include consideration which came eight months later, then it would have used the phrase “received or receivable,” which occurs over 60 times in the ITA. Since the only thing “received” at the time of disposition on December 23, 2013 was a promissory note, the value of consideration was limited to the note, not the funds which were subsequently paid in fulfillment of the note.

In addition, the court found that the promissory note was not acceptable consideration. The words of paragraph 118.1(13)(c), specifically, the phrase “any consideration (other than a non-qualifying security of any person),” meant that consideration used to purchase NQS from a foundation cannot itself take the form of NQS. The promissory note was a note between two non-arm’s length parties (the Corporation and the Foundation), and thus was an NQS. Since the promissory note was not acceptable consideration, the Taxpayer was not entitled to the charitable tax credit.

Therefore, the court concluded that the Taxpayer was not eligible for a charitable donation tax credit, despite the significant sum that was received by the Foundation for the NQS. This case serves as an important example of why private foundations and their donors need to be sensitive to the complex rules that apply to them under the ITA, and in particular to proceed very cautiously when considering making gifts of NQS. 


Read the October 2021 Charity & NFP Law Update