It is one of the more interesting aspects of practising law that allows lawyers to consider the situation when two laws designed for different purpose intersect. Sometimes these differences can cause difficulties, but when used creatively they can be the key to solving difficult problems. One such intersection involves a gift given with a condition subsequent and the revocation tax.
A condition subsequent results when a charity receives a gift subject to a condition with which it must continue to comply for as long as it holds the property. In fact, depending on the circumstances the condition may exist in perpetuity. If the charity does not comply with the condition subsequent then the donor is within his or her right to demand the return of the property. This does not happen often because as time passes, the donor may die and the family may forget that the gift was ever given let alone that the condition was attached to the property. Nevertheless, the charity (or the subsequent holder of the property) may find itself disentitled to the property if it ceases to comply with the condition.
The revocation tax applies to charities that have had their registered charity status revoked by the CRA. In these circumstances the charity becomes liable for a tax equal to 100 percent of its assets at the time the CRA sends a Notice of Intention to Revoke. An obvious question then concerns the valuation of property that is subject to a condition subsequent. The problem is best illustrated by example. If a charity owns a piece of property which is subject to a condition that the property always be used for the relief of poverty the property must only be used for that purpose by the charity and any subsequent owner. If the condition is breached the property may be seized without consideration by the original donor. Under those circumstances the use of the property is severely restricted to the point where its fair market valuation may be effectively nil (depending of course on the nature of the restriction, the type of property and its location).
In the calculation of the revocation tax then, the question becomes what value to use for the property which is subject to this condition subsequent. Is it the fair market value of the property otherwise determined or must the fair market value take into account some reduction in value related to the conditions subsequent? It seems clear that a qualified appraiser with some understanding of the net effect of such a condition would have to reduce the fair market value. Practitioners with these sorts of issues should consider carefully the actual calculation of the revocation tax. And tax planners may be able to plan for the ‘Big If’ of a charity losing its status by inserting conditions subsequent into their gifts.
By Adam Aptowitzer
Drache Aptowitzer LLP
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