CRA finds that the making of a loan at the prescribed rate under s. 189(1) does not prelude a penalty under s. 188.1(4)

S. 189(1) generally imposes tax on a taxpayer to the extent that the interest paid on loan made to the taxpayer that is a non-qualifying interest was less than the prescribed rate. Under s. 188.1(4), where an “undue benefit” (defined in s. 188.1(5)) has been conferred on a person by a registered charity, the charity is liable to a penalty equal to 105% (or 110%) of the value of the undue benefit conferred.

Headquarters rejected the proposition that where a registered charity that is a private foundation makes a loan at the prescribed rate of interest when the loan recipient receives the loan because of that debtor’s relationship with the private foundation or the foundation’s board of directors, the avoidance of any s. 189(1) tax on the debtor (because of the prescribed rate being used) means that there cannot be a penalty for undue benefits imposed on the private foundation under s. 188.1(4) in respect of the loan.

Neal Armstrong. Summary of 5 December 2019 Internal T.I. 2017-0683831I7 under s. 188.1(4).