Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Guidance requested with respect to back to back loans provisions
Position: General comments provided
2009-030794
XXXXXXXXXX Sylvie Danis
(613) 957-3496
May 11, 2009
Dear XXXXXXXXXX :
Re: Subsection 118.1(16) and 118.1(17) of the Income Tax Act
This is in response to your fax of January 27, 2009, wherein you requested our comments with respect to the application of the loanbacks provisions of subsections 118.1(16) and 118.1(17) of the Income Tax Act (the "Act") to situations where a donor makes a gift to a registered charity and within 60 months of the time of making the gift, the donor or a person who does not deal at arm's length with the donor uses property of the donee by way of loan from the charity. For purposes of this discussion, it is assumed the loan reflects commercial terms and conditions.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency (CRA).
Section 118.1 of the Act provides that individual taxpayers may claim a credit against taxes payable, within specified limits, for an eligible amount of a gift made to a qualified donee, if supported by official receipts.
Subsection 118.1(16) of the Act provides that for purposes of section 118.1 of the Act, where at any particular time an individual makes a gift of property, and within 60 months after the particular time, the individual or any person or partnership with which the individual does not deal at arm's length uses property of the donee under an agreement that was made or modified after the time that is 60 months before the particular time, and the property was not used in the carrying on of the donee's charitable activities, the fair market value of the gift is deemed to be that value otherwise determined minus the fair market value of such a property so used. Subsection 118.1(17) of the Act provides that for the purpose of applying subsection 118.1(16) of the Act to determine the fair market value of a gift made at any time by a taxpayer, the fair market value of property described in subsection 118.1(16) of the Act is deemed to be that value otherwise determined minus any portion of it that has been applied under that subsection to reduce the fair market value of another gift made before that time by the taxpayer. In other words, subsection 118.1(17) of the Act applies an ordering rule for the purpose of subsection 118.1(16) so that the use of a donee's property by a donor, or a person not dealing at arm's length with the donor, will reduce the donor's charitable donations tax credits on a "first-in, first out" basis.
Subsection 118.1(17) of the Act applies on a taxpayer by taxpayer basis and as such, where multiple individuals gift to a qualified donee and a person with which these individuals do not deal at arm's length uses property of the donee and the property was not used in the carrying on of the donee's charitable activities, the provision will be applied to each donor separately. Accordingly where two donors, who do not deal at arm's length with each other, each make a gift of cash to a charity and an amount is loaned back by the charity to one of the donors, the amount of the loan appears to be taken into account in determining the deemed fair market value of the gift made by each of the donors. We have brought this result to the attention of the Department of Finance for their consideration.
Finally, the Act does not provide for the reinstatement of a gift for purposes of subsection 118.1(1) in the event the property used by the donor or person not dealing at arm's length with the donor is returned to the charity.
We trust the above comments are of assistance. However, as stated in paragraph 22 of Information Circular 70-6R4, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Revenue Agency in respect of any particular situation.
Yours truly,
F. Lee Workman
Manager
Charitable and Financial Institutions Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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