21 February 1990 Ministerial Letter 74658 F - Donation of Debt

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.

Subject: Donation of Debt

This is in reply to your T2003 of January 7, 1990, with attached article entitled "Donations of LDC debt by banks to charities". You ask whether donations of a debt to a registered charity by a Canadian lender would be deductible in Canada as a charitable donation.

We recently discussed this same subject with officials of  24(1). In that meeting we ventured the opinion that such a donation of debt by, for instance, a Canadian bank would result in the issuance of a charitable donation receipt by the recipient charity.  We cautioned, however, that the main problem facing charities in these circumstances would be that of valuation.  We pointed out that the donation of debt would have to be valued firstly in Canadian dollars and secondly at fair market value. We offered no opinion on a valuation method but suggested that the bank or other lending institution and the charity would have to agree on the value of the debt in Canadian dollars and it would then be up to the Department to either accept or challenge that valuation.

We note, of course, that the donor will have to report the value of the gift as proceeds of disposition of the debt.  Thus what normally would have been a bad debt write-off would now become an income inclusion and a tax deduction by way of a charitable donation or perhaps a promotional expense.  The donor will not have bettered its tax position and may, in some cases have worsened it.  Such would be the case if the donor had already reached its charitable donation limit.

We trust our comments will be helpful.

B.W. DathDirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch