15 November 1990 Internal T.I. 902957 F - Political Donations

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:  Political Donations

I am replying to your memorandum of October 22, 1990 with attached letter from 24(1) concerning the potential tax liability of eventual recipients of receipted political donations.

On the assumption that the initial recipient is a federal party or the official agent of a candidate and a valid receipt has been issued to the contributor for the contribution in accordance with the rules in subsections 127(3) to 127(4.2) inclusive of the Income Tax Act you ask the following two questions:

1.     What are the tax consequences if money collected by a federally registered party as political contributions are used as a gratuitous payment to an individual?

2.     What are the tax consequences if money collected by the official agent of a duly nominated candidate at a federal election exceeds the campaign expenditures and the remainder is used to provide a benefit to an individual?

The Income Tax Act does not explicitly regulate the manner in which political parties may expend their receipted contributions. Registered Canadian political parties are however generally considered to be non-profit organizations (NPO) for purposes of the Act. In order for a particular registered Canadian political party to maintain its tax exempt status under paragraph 149(1)(1) of the Income Tax Act, it must comply with certain conditions respecting the use of its funds. These conditions include:

(1)     the fund must be used exclusively in carrying on its exempt objectives (please refer to the comments in paragraph 8 & 9 of Interpretation Bulletin IT-496), and

(2)     no part of its funds may be paid, payable or otherwise available for the personal benefit of any member (please refer to paragraph 11 & 12 of Interpretation Bulletin IT-496).

A copy of Interpretation Bulletin IT-496 is enclosed.

Where funds of a political party are used to make a gratuitous payment to an individual it can be said that the party, as an NPO, is not using its funds exclusively to meet its objectives or if the funds went to a member it would be contravening the provision in paragraph 149(1)(1) that states that no part of an NPO's income can be paid or made available to members. Where this is the case the political party could lose its status as a tax exempt NPO.

The foregoing is equally applicable to the excess of contributions over election expenses. Additionally section 232 of the Canada Elections Act requires the official agent of a candidate to pay any excess election funds to any local organization of the party or association of members of the party in the electoral district of the candidate or to the registered agent of the party. The Canada Elections Act is administered by the Chief Electoral Officer.

Thus use of political donations in the manner described above would not only be inconsistent with the intent of the political contribution tax credit provisions of the Income Tax Act but could in some cases also contravene the NPO provisions of the Income Tax Act or certain provisions of the Canada Elections Act.

With respect to the taxability of the eventual recipient of the political contribution, if at the time the contribution was made the contributor had an expectation that all or a part of the funds would be returned to him in any matter whatever, the original contribution receipt could be voided as not being a true contribution.

24(1)

Where, on the other hand, the ultimate recipient is someone other than the contributor, there could be an income inclusion. This would depend on the facts in each and every case. A full review of all circumstances in a particular fact situation would be required. For instance the recipients might be considered an employee of the Party with the onus on the Party to issue a T4 slip. In another case subsection 56(2) might be involved whereby a Party member may attempt to have a personal debt paid by directing that contributions be paid to a third party on his or her behalf.

In a situation where the funds received out of political contributions is in fact payment for services rendered there would be an income inclusion under section 9 of the Act or failing that, where the issue is not clear, section 3 and 4 would require an inclusion in income on the basis of source. All of the above inclusions would depend, of course, on disclosure of payment or receipt of the funds. On a final note, where a party pays a true gratuity or makes an out and out gift for no consideration such a payment could very well be a non- taxable windfall, however, it would be important to examine all the circumstances of such a gratuity or gift before a final determination could be made.

I trust this is the information you require.

Yours truly,

Director GeneralRulings DirectorateLegislative and IntergovernmentalAffairs Branch