All About Estates

Private foundations & private company shares

Philanthropic individuals that own their wealth in a private company may want to set-up a charitable legacy by donating some of their shares or debt to a private foundation. Although this sounds like a great idea, caution needs to be exercised.

Donations of private company shares or debt to a private foundation may not result in a charitable donation tax credit under the Income Tax Act (ITA) due to the non-arm’s length relationship between the donor and the private foundation unless the shares or debt are sold to an arm’s length person within 60 months.

Private Foundation

A private foundation is defined in the ITA as a charitable foundation that is not a public foundation, and a public foundation is defined in the ITA as a charitable foundation that meets the following two arm’s length criteria[i]:

  1. more than 50% of the directors, trustees, and officers deal at arm’s length with each other and the majority contributor, and
  2. the foundation is not controlled by the majority contributor[ii].

Generally, a private foundation is not dealing at arm’s length with the donor of private company shares or debt.

A little bit of history

Legislative amendments were introduced in 1997 to specifically curtail perceived abusive donations involving non-arm’s length donors. The 1997 Federal budget originally introduced a proposed 50 per cent penalty tax, but this proposed penalty tax was later replaced with legislative provisions that either deny or delay the recognition of the non-arm’s length gift for purposes of the qualifying donation. This was accomplished by introducing the concept of “non-qualifying securities”. Non-qualifying securities of an individual would generally be:

  • an obligation of the individual or a non-arm’s-length person,
  • a share issued by a corporation with which the individual does not deal at arm’s length, or
  • any other security issued by the individual or a non-arm’s-length person.

The operation of the denied or delayed recognition of the donated non-qualifying securities under subsection 118.1(13)[iii] is best explained in the December 1997 explanatory notes from Department of Finance:

Subsection 118.1(13) of the Act provides that if an individual makes a gift of a non-qualifying security, that gift will be ignored for the purpose of the charitable donations tax credit. However, if the donee disposes of the security within five years or the security ceases to be a non-qualifying security of the individual within five years, the individual will be treated as having made a gift at that later time.

The fair market value of the later gift will be considered to be the lesser of two amounts. The first amount is the consideration received by the donee for the disposition (except to the extent that the consideration is another non-qualifying security of the individual) or in the case of the security ceasing to be a non-qualifying security, its fair market value at that later time. The second amount is the fair market value of the original gift as modified by subsection 118.1(6). This subsection does not apply to excepted gifts.

Arm’s length Sale within 60 months

If the donee disposes of the non-qualifying securities within 60 months of receipt, then the originally denied gift will be recognized at the time of the donee’s disposition under paragraph 118.1(13)(c).  The recognized amount, as detailed in the explanatory notes, excludes any consideration that would be considered non-qualifying securities. Given the definition of non-qualifying securities, the disposition by the donee must be to an arm’s length party to qualify.


There are two leading cases regarding the application of subsection 118.1(13).  In 2009, the Federal Court of Appeal in Remai Estate v. R.[iv] concluded that the consideration received by the donee from the sale of two promissory notes was not a non-qualified security because the sale occurred between arm’s length parties.  More recently in 2021, the Tax Court in Odette (Estate) v. The Queen[v] concluded that the promissory note received from a non-arm’s length private company on redemption of the company’s shares by the donee was considered a non-qualifying security, resulting in no gift for the purposes of calculating the charitable donation tax credit. The fact that the promissory note was paid with cash merely months after the note was issued did not alter the legal form of the promissory note, which met the definition of non-qualifying securities.

CRA comments

In a technical interpretation[vi] issued by Canada Revenue Agency (CRA) in response to a question at the 2021 APFF conference, CRA stated that for the purposes of paragraph 118.1(13)(c), the consideration received by the qualified donee for the disposition of the non-qualifying securities may include the portion of that consideration that is a deemed dividend received by the qualified donee under subsection 84(3) on a redemption of shares. This technical interpretation, which was issued just over a week after the Odette decision, does not address the “legal form” of the consideration received on redemption (i.e. promissory note or cash), which was an extremely important fact in the Odette case.  CRA’s comments, although welcoming, are incomplete and do not override the jurisprudence.


With a little history and jurisprudence, we have a good understanding of how donations of non-qualifying securities are treated in the ITA.  With this information we can properly design philanthropic plans involving private companies and private foundations.


[i] Private foundation and public foundation are defined in section 149.1 of the ITA and are only paraphrased here.

[ii] Majority contributor is not a defined term. In this blog, majority contributor refers to a person that contributed greater than 50 per cent of the foundation’s capital.

[iii] Subsection 118.1(13) added by 1998, c. 19, subsection. 22(7), applicable to gifts made after July 1997.

[iv] Remai Estate v. R., 2009 FCA 340

[v] Odette (Estate) v. The Queen 2021 TCC 65

[vi] 2021-0901041C6

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About John Oakey
National Tax Director for Baker Tilly Canada. John has extensive experience with Canadian corporate and personal income taxes with specialization in the areas of corporate reorganizations, estate planning, succession planning and tax compliance. He also has significant experience dealing with GST/HST issues and U.S. citizen cross-border tax reporting issues.

1 Comment

  1. Malcolm Burrows

    March 21, 2023 - 1:54 pm

    John – Thank you for your excellent summary. By design, the ITA is structured to shut down donations of private company shares to private foundations and discourage these donations to arm’s length public charities due to inherent trust and capacity issues. There are good solutions but they are grounded as much in charity process and governance as tax. Malcolm

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