In a recent advanced income tax ruling request, CRA discussed whether the transfer of 100% of the voting common shares of a taxable Canadian corporation to a public foundation resulted in the public foundation acquiring control of the corporation. Under the Income Tax Act, if a public foundation acquires control of a corporation, it can have its charitable registration revoked.
While the ruling is heavily redacted, the situation addressed by CRA appears to be as follows. A charitable organization and a public foundation dealt with each other at arm’s length and were each governed by independent boards. Certain technology was developed by the charity that could potentially be commercialized, and a corporation was established for the purpose of acquiring and commercializing this technology. In return for transferring the intellectual property for the technology to the corporation, the charity was issued shares in the corporation, which it intended to gift to the Foundation. The proposed transaction, for which a ruling was sought, was the transfer of the common shares in the capital of the Corporation to the Foundation pursuant to a deed of gift.
The Income Tax Act provides that a public foundation will not be considered to have acquired control of a corporation where it has purchased less than 5% of the shares of the corporation for consideration. In the situation addressed in the ruling, CRA confirmed that the Foundation will be deemed not to have acquired control of the Corporation as a result of the transaction since the Foundation acquired less than 5% of the Corporation’s shares for consideration.
The ruling serves as a reminder that public foundations are prohibited from acquiring control of corporations. If a foundation fails to take account of this rule and acquires a majority shareholding position in a corporation, its charitable registration may be at risk. However, this ruling confirms that, with proper planning and advice, transactions can be structured so as to avoid this result.