4 October 1995 External T.I. 9428885 - DEBTS OF A CHARITY

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

            942888
XXXXXXXXXX  A.M. Brake

Attention: XXXXXXXXXX

October 4, 1995

Dear Sirs:

Re: Charitable Gifts

This is in reply to your letter of October 14, 1994 to our Charities Division who forwarded it for our response. You posed three questions which are as follows:

1.Paragraph 5 of IT-226R refers to "current interest rate" and you asked whether the prescribed rate, the calculation of which is set out in Regulation 4301(a), would be appropriate for purposes of determining the present value of an equitable interest in property?

2.Paragraph 3 of IT-226R refers to a transfer of any property to a trust with the requirement that the property be distributed to a charity at a future date. You asked what happens if the property initially contributed is sold by the trust and replaced with different property having the same fair market value?

3.Paragraph 149.1(4)(d) of the Income tax Act refers to a debt "incurred in connection with the purchase and sale of investments..." and in this regard you asked whether this could include debts, presumably loans, for the actual purchase price of the investments?

Our comments

1.It should be noted that the "current interest rate" is only one of several factors to be considered in determining the present value of an asset at a future time. Since this is a valuation problem, in itself, we are reluctant to comment other than to say that the rate described with reference to the Canada Treasury Bills in Reg. 4301(a), not including the additional 2% set out in Reg. 4301(b), would be an appropriate "current interest rate" but should not be construed as representing an appropriate discount rate. The appropriate discount rate to be used in the valuation of an equitable interest in a property would be a determination to be made based on the facts of a particular situation. Since valuation issues fall within the responsibility of our Valuation Services, we suggest you direct any future questions to the attention of Elizabeth Shultis, at the following address:

Audit Directorate
Valuation Services
123 Slater Street, Room 801
Ottawa, Ontario

2.If the requirement was to hold a particular property in trust for the charity until such time as the life interest expired at which time the actual ownership could transfer to the charity, it would seem that by replacing the property with another property the direction will not have been followed. In this regard, paragraph 2 of IT-226R, contains a list of requirements which must be met in order for the Department to consider that a gift has been made. In our view, this situation would fall short of meeting these requirements.

As any further comments that we could make on this issue would be based on questions of fact, we would only be prepared to address this issue should we be provided with a specific proposed transaction in the context of an advance income tax ruling request.

3.Paragraphs 149.1(3)(d) and 149.1(4)(d) allow the Minister to revoke the registration of a public or a private foundation, if the foundation "incurred debts, other than debts for current operating expenses, debts incurred in connection with the purchase and sale of investments and debts incurred in the course of administering charitable activities."

In our opinion, the debts which are excepted by paragraphs 149.1(3)(d) and 149.1(4)(d) of the Act are those which arise directly in the course of the purchase and sale of investments or incurring operating expenses or in the course of administering charitable activities. We do not consider a debt to be excepted when it arises in the course of borrowing money unless it is incurred directly in the process of the purchase and sale of investments or in funding continued operations or charitable activities. In particular, in our view, loans obtained or debts incurred for the purpose of permitting a public or private foundation to purchase investments are not debts "incurred in connection with the purchase and sale of investments". Also, we would not consider a debt to be excepted even where proceeds from borrowings were being used to discharge debts which were, when incurred, excepted debts.

In the recent case of Corporation Notre-Dame de Bon-Secours v. Communauté urbaine de Québec and City of Québec, (1994) 3 S.C.R. 3, the Supreme Court of Canada analyzed the rules for interpreting tax legislation. On page 17 thereof, Gonthier, J. made the following comments with respect to the ordinary rules of statutory interpretation:

"... there is no longer any doubt that the interpretation of tax legislation should be subject to the ordinary rules of construction. At page 87 of his text The Construction of Statutes (2nd edition 1983), Driedger fittingly summarizes the basic principles: "... the words of an Act are to be read in their entire context in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act and the intention of parliament." The first consideration should therefore be to determine the purpose of the legislation, whether as a whole or as expressed in a particular provision. The following passage from Vivien Morgan's article "Stubart: What the Courts Did Next" (1987), 35 Can. Tax J. 155 at pp. 169-70, adequately summarizes my conclusion:

There has been one distinct change (after Stubart), however, in the resolution of ambiguities. In the past, resort was often made to the maxims that an ambiguity in a taxing provision is resolved in the taxpayer's favour and that an ambiguity in an exempting provision is resolved in the Crown's favour. Now an ambiguity is usually resolved openly by reference to legislative intent. (Emphasis added.)"

In our view, when you consider the words "purchase and sale" and the type of debt that is being referred to in the words "in connection with", one would have to conclude that it would be a miscellaneous type of debt such as brokerage fees or other incidental amounts that could relate either to the purchase or the sale. This would certainly exclude a debt relating to the purchase price as there is no similar loan or debt which would arise on a sale. Furthermore, the words should be interpreted in the context from which they are drawn and in this regard the words "debts for current operating expenses" and "debts incurred in the course of administering charitable activities" would be an indication of short term debt of smaller amounts and not long term debt or loans for purposes of purchasing investments in that such acquisitions have a connotation of long term larger amounts. If it was intended that the excepted debts were to include unlimited debt for the purchase of long term investments, there would be few, if any, debts prohibited by paragraphs 149.1(3)(d) and 149.1(4)(d) of the Act.

We trust our comments will be of assistance to you and apologize for the delay in replying.

Yours truly,

R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch