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: Can a loan advanced by a charity to a person at prescribed rates result in an undue benefit?
Position: Possibly, it is a question of fact.
Reasons: The definition of undue benefits is broad. All factors must be considered when determining whether an undue benefit exists.
December 5, 2019
Workload Development and HEADQUARTERS
Quality Assurance Section Income Tax Rulings
Compliance Division Directorate
Charities Directorate Steven Szilagyi
(613) 670-9072
Attention: Elizabeth Glover
2017-068383
Prescribed Rates and Undue Benefits
We are writing in response to your email dated January 19, 2017 requesting our views with regard to the interconnection, if any, between the non-qualifying investment (NQI) and the undue benefits provisions found in Part V of the Income Tax Act (the Act). We apologize for the delay in our response.
Briefly, you are encountering situations where a registered charity that is a private foundation advances an amount to an individual or business as a loan at the prescribed rate of interest. The recipient of the loan (the debtor) receives the amount because of the debtor’s relationship with the private foundation or the foundation’s board of directors. It has been suggested to you that if the NQI provisions in section 189 of the Act do not apply to the debtor with respect to a particular loan then the undue benefit provisions in subsections 188.1(4) and (5) of the Act would not apply to the private foundation.
You have asked whether a private foundation can be subject to a penalty for undue benefits under subsection 188.1(4) of the Act in respect of a loan advanced to a debtor in a situation where subsection 189(1) of the Act does not apply to such debt owing by the debtor.
Under subsection 189(1) of the Act, where at any particular time in a taxation year, a debt (other than a debt in respect of which subsection 80.4(1) of the Act applies or would apply but for subsection 80.4(3) of the Act) is owing by a taxpayer to a private foundation and, at that time, the debt was a NQI of the foundation, the taxpayer is required to pay a tax for the year equal to the amount that is the interest that would be payable on the debt based on rates prescribed from time to time during the taxation year less any interest paid on the debt by the taxpayer not later than 30 days after the end of the taxation year. In general terms, subsection 149.1(1) of the Act defines a NQI of a private foundation as a debt owing to the foundation, or a share held by a private foundation that is issued by certain persons who are in a position to control or influence the operations of the foundation, as well as a right held by the foundation to acquire such a share. Specifically, in the context of debt, the NQI definition refers to a debt (other than a pledge or undertaking to make a gift) owing to the foundation by a person (other than an excluded corporation)
1) who is a member, shareholder, trustee, settlor, officer, official, or director of the foundation;
2) who has contributed, or is a member of a group of non-arm’s length persons who have contributed, more than 50% of the foundation's capital; or
3) who does not deal at arm’s length with any person described in (1) or (2).
The NQI definition also refers to a debt owing to the foundation by a corporation (other than an excluded corporation) controlled by
a) the foundation,
b) any person or group of persons referred to in (1), (2) or (3) above,
c) the foundation and any other private foundation with which it does not deal with at arm's length, or
d) any combination of (a), (b) and (c);
An excluded corporation for purposes of the NQI definition is (1) a limited-dividend housing company; (2) a corporation all of the property of which is used by a registered charity in its administration or in carrying on its charitable activities; or (3) a corporation all of the issued shares of which are held by the private foundation.
Under subsection 188.1(5) of the Act, an undue benefit conferred on a person (beneficiary) by a registered charity includes the following:
1) a disbursement by way of a gift; and
2) the amount of any part of the income, rights, property or resources of the registered charity that is paid, payable, assigned or otherwise made available for the personal benefit of any person who
a) is a proprietor, member, shareholder, trustee or settlor of the charity,
b) has contributed or otherwise paid into the charity more than 50% of the capital of the charity, or
c) does not deal at arm’s length with a person described in (a) or (b) or with the charity.
An undue benefit also includes any benefit conferred on a beneficiary by another person, at the direction or with the consent of the charity that would, if it were not conferred on the beneficiary, be an amount in respect of which the charity would have a right. However, an undue benefit does not include a disbursement or a benefit conferred to the extent that it is a gift made or a benefit conferred in the course of a charitable act in the ordinary course of the charitable activities of a charity unless it can reasonably be considered that the eligibility of the beneficiary related solely to the relationship of that person to the charity. An undue benefit also does not include a gift to a qualified donee or reasonable consideration or remuneration for property acquired by or services rendered to the charity.
Where an undue benefit has been conferred on a person, subsection 188.1(4) of the Act provides that the charity is liable to a penalty equal to 105% of the value of the undue benefit conferred. The penalty is increased to 110% of the undue benefit if, within the previous five taxation years, the charity was liable to a penalty under this provision.
The determination of whether a charity has conferred an undue benefit on a person can only be made on a case-by-case basis following a review of all the facts and circumstances surrounding a particular situation, including a review of the underlying documentation.
In our view, given that subsection 189(1) of the Act and subsection 188.1(4) of the Act apply to different parties, each of these provisions must be considered independently of each other. The fact that a particular taxpayer may not be subject to a tax under subsection 189(1) of the Act in respect of a loan received from a registered charity does not, in and of itself, preclude the charity from being assessed a penalty under subsection 188.1(4) of the Act where the facts and circumstances establish that the loan is an undue benefit conferred on the particular taxpayer.
We trust that these comments will be of assistance. Please do not hesitate to contact us if you have any further questions.
Yours truly,
Bob Naufal
Manager
Financial Institutions Section
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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