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.
Principal Issues:
Whether debts "incurred in connection with the purchase and sale of investments..." by a charity would include borrowing for the actual purchase price of the investments.
Position:
Such debts could expose the charity to deregistration.
Reasons:
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 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.
970020
XXXXXXXXXX A.M. Brake
(613) 957-2133
Attention: XXXXXXXXXX
April 4, 1997
Dear Sirs:
Re: Debts Incurred By A Charity, Paragraph 149.1(4)(d)
This is in reply to your letter of December 30, 1996 wherein you made reference to the 1988 Canadian Tax Foundation Conference at which a paper presented by an outside practitioner suggests that individuals can loan funds to their private foundations, and that it is also possible to sell shares to a foundation and take back a non-interest-bearing promissory note.
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, in our view, would not include debts, such as loans or promissory notes, for the actual purchase price of the investments.
The Department's position relating to debts incurred by a charity, remains as set out in our technical interpretation #942888, dated October 4, 1995, and pertinent comments are reproduced below.
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.
Yours truly,
R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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