The Budget has introduced provisions designed to delay the recognition of a gift where an option to acquire a property is donated to a qualified donee. Prior to the introduction of these provisions, where a donor granted an option to acquire a property to a qualified donee, a receipt could be issued and the gift was recognized immediately for the value of the option.
Parallel provisions are proposed for gifts by individuals and corporations. Generally, where a donor issues an option to a qualified donee, the recognition of the resulting gift is delayed until the option is exercised by the qualified donee.
Where an option is given to a qualified donee and is exercised by the qualified donee to enable the qualified donee to acquire property, it will be deemed to be a gift at the time of exercise where one of two conditions is met:
- 80% of the fair market value of the property exceeds the total of
- any consideration received by the donor from the qualified donee to acquire the property, plus
- any consideration received by the donor from the qualified donee to acquire the option; or
- the donor establishes to the satisfaction of the Minister that the granting of the option and the disposition of the property subject to the option was made by the donor with the intention of making a gift.
Based on the above, a gift will not be recognized where the total of the amount paid by the qualified donee for the property and the option exceeds 80 per cent of the fair market value of the property at the time of acquisition by the qualified donee. These rules are designed to be in keeping with the (still proposed) split-receipting “80/20 rule” that provides that where an advantage associated with a gift exceeds 80 per cent of the value of the property transferred, there is no gift.
When either of these two conditions is met and the exercise of the option triggers the recognition of a gift, the donor is deemed to have disposed of property (i.e., the option) for proceeds equal to the underlying property’s fair market value at the time of exercise. As well, the donor is deemed to have made a gift to the qualified donee equal to the amount by which the fair market value of the underlying property exceeds the amount of any consideration received (as described in 1 above). We note that there appears to be a technical error in the drafting of this particular portion of the proposed legislation but we believe that this is what was intended by these new rules.
Where an option to acquire property is gifted to a qualified donee and subsequently disposed of by the qualified donee (i.e., it is sold prior to being exercised), the donor is deemed to have disposed of property:
- at an amount equal to the cost of any consideration paid by the qualified donee to acquire the option in property in the first place; and
- for proceeds of disposition equal to the fair market value of any consideration (other than a non-qualifying security) received by the qualified donee for disposing of the option in property (i.e., the sale price, if any).
In these circumstances, the donor is also deemed to have made a gift for receipting purposes equal to the proceeds of disposition in 2 above (i.e., the sale price if the option is sold) less any consideration paid by the qualified donee to acquire the option in the first place.
In light of these complicated new rules, charities and other qualified donees that are approached by a donor with a potential gift of options should seek specific advice before accepting such gifts.