In a previous article,[1] we discussed amendments to the Income Tax Act (Canada) (the “Act”), enacted in 2015, that significantly changed the rules for testamentary charitable gifts made in 2016 and future tax years.

One of the requirements introduced as part of the 2015 amendments was the requirement that, to qualify for a charitable donation tax credit, the property which is the subject matter of the charitable gift must be either property that was acquired by the deceased taxpayer’s estate on and as a consequence of death, or property that is substituted for it. We noted that, in an estate that holds shares of a private company, if a charitable gift made by will is satisfied using funds paid to the estate from the company in the form of a cash dividend, the dividend is not generally considered substituted property (unless paid on a redemption of the shares).

In an Advance Income Tax Ruling in 2020 (the “Ruling”),[2] the Canada Revenue Agency (“CRA”) considered the issue of substituted property in the context of a reorganization involving a stock dividend. The proposed transactions that were the subject matter of the Ruling are as follows:

  • The estate at issue (the “Estate”) held all of the common shares of a corporation (“Aco”), which, due to numerous reorganization transactions, were replacements of shares which the deceased either held on death or was entitled to receive;
  • Aco would declare and pay a dividend on the common shares held by the Estate;
  • The authorized capital of Aco would be increased to include preferred shares, which would have an aggregate redemption price equal to the fair market value (“FMV”) of the common shares of Aco, less their paid up capital;
  • The directors of Aco would then declare a stock dividend on the common shares of Aco, and issue preferred shares of Aco in satisfaction of the stock dividend;
  • Aco would then redeem the preferred shares held by the Estate, and elect for the deemed dividend resulting from the redemption to be treated as a capital dividend under subsection 83(2) of the Act, and pay the redemption price to the Estate in cash;
  • Aco would then repurchase the common shares of Aco held by the Estate and pay the purchase price in cash equal to their paid-up capital;
  • At the same time, Aco would issue one common share to the Estate (so that there was still at least one issued and outstanding share) and also repay the balance of an outstanding shareholder loan in favour of the Estate;
  • Immediately before the time of the gift, the Estate determined the final donation amount, which would be satisfied from a combination of the cash received by the Estate on the redemption of the preferred shares, the cash received by the Estate on the repurchase of the common shares of Aco, and the cash received by the Estate on the repayment of the shareholder loan; and
  • The Estate would then gift the final donation amount to a qualified donee.

The CRA provided favourable rulings, finding that all of the funds from which the Estate proposed to pay the charitable gift constituted substituted property for property that was acquired by the Estate on and as a consequence of the death of the deceased taxpayer. In particular, it noted that the declaration of the stock dividend followed by the redemption of the preferred shares that were issued in satisfaction of the stock dividend satisfied the “…requirements of paragraph 118.1(5.1)(b) and the CRA’s position that cash paid as actual dividends cannot be substituted property.”[3]

The CRA’s Ruling is a reminder that not all dividends are created equal, and while a cash dividend paid in the normal course will generally not be substituted property, there are options for structuring gifts so that they are substituted property.

Should you have any questions or concerns, please feel free to reach out to a member of Miller Thomson’s Social Impact group.


[1] See Darren G. Lund, Revisiting the “new” testamentary donation rules, (December 15, 2022)

[2] Canada Revenue Agency, CRA Views, Ruling, 2020-0862441R3 – Charitable donation by estate (2020) [Ruling].

[3] Ruling, supra note 2 at par. 55.