Non-Qualifying Security Anti-Avoidance Rules

March 22, 2011 | Kate Lazier

The non-qualifying security rules are designed to prevent a person from receiving a donation tax receipt where the person’s gift to a qualifying donee is a share, debt obligation or other security of the person or of a person not at arm’s-length from the person.  This type of gift is known as a non-qualifying security (“NQS”). In general, the rules provide that the person can receive a donation tax receipt for a gift of a NQS when within 5 years either: (i) the qualifying donee sells the NQS (for consideration other than another NQS of the individual) or (ii) the gift is no longer a NQS.

For example, if a person issues a personal debt to a charity for $1000, they do not receive a charitable tax receipt for $1000 at that time.  If within the 5 year period, the person pays the charity $1000 for the gifted debt obligation, they receive a charitable tax receipt of $1000 at that time.

The Income Tax Act currently provides that a donor receives a receipt when the qualifying donee sells the NQS for consideration other than another NQS of the donor.  The Budget proposes to broaden this to deny receipts where the qualifying donee sells the NQS in exchange for a NQS of any person.

Further, the Budget proposes new rules to catch situations in which a donor avoids the application of these rules by implementing a series of transactions, where at the end of the series of transactions the qualifying donee holds a NQS of the donor.  The Budget proposes two rules.  The first rule catches a specific series of transactions.  The second rule is a more general rule to catch any series of transactions where a person makes a gift to a qualifying donee, the qualifying donee receives a NQS, and it is reasonable to consider that a purpose or result of the qualifying donee’s acquisition of the NQS was to facilitate the person’s gift.

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