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.
January 24. 1992
Trish Gorie Business and General
Charities Division Division
5th Floor H. Woolley
400 Cumberland Street (613) 957-2139
920196
24(1)
This is in reply to your memorandum dated January 20, 1991 in which you requested our comments on subsection 149.1(3) of the Income Tax Act (the "Act") in regards to 24(1).
Facts
24(1)
Proposed Transactions
24(1)
Purpose of the Proposed Transactions
It is our understanding that the purpose of this series of transactions is:
(i) to allow certain researchers at 24(1) to participate in the profits realized as a result of their work, and
(ii) to qualify for certain refundable tax credits offered by the province of Quebec. These credits would not be available to a corporation that was controlled directly or indirectly by a hospital or public foundation.
Issues
1. If 24(1) assists NCorp in obtaining financing would this be considered a "charitable purpose" as set out in the definition of "charitable foundation" in subsection 149.1(1) of the Act.
2. If NCorp defaulted on its loan and the guarantee or security pledged by 24(1) was required to repay such loan would 24(1) be considered to have incurred a debt for other than a reason set out in paragraph 149.1(3)(d) of the Act.
"Charitable Purpose"
If 24(1) assists NCorp obtain financing and receives consideration for doing so it must consider:
(i) whether such activity precludes it from being "operated exclusively for charitable purposes" as is required for all charitable foundations by the definition of "charitable foundation" in subsection 149.1(1) of the Act.
(ii) whether such activity means 24(1) "carries on a business that is not a related business of that charity" as set out in paragraph 149.1(3)(a) of the Act and which could result in 24(1)having its registration revoked.
It is a question of fact whether a foundation is "operated exclusively for charitable purposes". Your division is in a better position to make this decision, however, we can provide the following comments.
24(1)
. It is our view that initiatives that allow charities to retain valued employees should be reviewed in relation to the overall aims of the charity and the fact that employees may personally benefit from these initiatives should not necessarily, in and by itself, exclude the initiatives from being charitable ones.
24(1)reasons for agreeing to assist NCorp in obtaining financing appear twofold:
(i) to receive a fee, and
(ii) to allow 24(1) to receive 24(1) of the profits of NCorp.
Whether an entity is carrying on a business for the purpose of the Act is a question of fact that depends on the circumstances of the particular situation. Assisting NCorp obtaining financing for a fee has the characteristics of an adventure in the nature of trade, however, an isolated transaction may not constitute carrying on a business (see Minister of National Revenue v. Tara Exploration and Development Co. Ltd. 72 DTC 6288). Even if assisting NCorp obtain financing for a fee is regarded as carrying on a business, if 24(1) uses this income to carry out its stated objectives, such activity may be considered as a related business.
NCorp's Default on Loan
24(1) may assist NCorp obtain financing in one of two ways:
(i) provide a loan guarantee, or
(ii) pledge its assets as security for the loan.
The issue of whether a debt has been incurred in a particular circumstance is a legal matter. Although we have not received a legal opinion on this matter, it is our view that in either (i) or (ii) above 24(1) will not be considered to have incurred a debt at the time NCorp receives the loan. However if at some future time NCorp defaults on its loan, 24(1) will incur a debt if it has provided a loan guarantee because 24(1) will become indebted to the financial institution and will take the place of the financial institution as the creditor of NCorp.
24(1),21(1)(b)
If 24(1) does become indebted to the financial institution it will only be in violation of paragraph 149.1(3)(d) of the Act if the debt is incurred for other than a qualifying purpose as provided in that provision, namely, for current operating expenses, for the purchase and sale of investments or for administering charitable activities. It is our view that the debt would not be incurred for one of these stated purposes.
24(1),21(1)(b)
The foregoing was prepared after consultation with Legal Services (A. Davidson). We trust our comments are of assistance.
Yours truly,
E.Wheelerfor DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
c.c. Mr. A. Davidson (Legal Services)
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