31 March 2026 Internal T.I. 2025-1076591I7 - Undue benefits

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.

Principal Issues: Can undue benefits include disbursements by way gift of other than those made to any person who is a proprietor, member, shareholder, trustee or settlor of the charity or association, who has contributed or otherwise paid into the charity or association more than 50% of the capital of the charity or association, or who deals not at arm's length with such a person or with the charity or association.

Position: Yes.

Reasons: The definition "undue benefit" is an inclusive definition where such disbursements, among others, that are not excepted by paragraphs (a) through (c), may be captured.

XXXXXXXXXX					HEADQUARTERS
						Income Tax Rulings Charities Directorate							Directorate
						Alex Johnstone

2025-107659

March 31, 2026

Re: Undue benefits

We are writing in response to your email dated August 25, 2025 and our discussion on December 1, 2025 (XXXXXXXXXX/Johnstone) wherein you requested our comments regarding the scope of the definition of “undue benefit” in subsection 188.1(5) of the Income Tax Act (Act). Specifically, you have asked whether an undue benefit penalty can apply in cases where a registered charity provides a non-incidental private benefit directly to a beneficiary, without the beneficiary having any connection to the registered charity. We apologize for the delay of our response.

Our comments

Subsection 188.1(5) of the Act defines an undue benefit for the purposes of Part V. As described in subsection 188.1(5) of the Act, an undue benefit conferred on a person (beneficiary) by a registered charity includes the following:

(1) a disbursement by way of a gift;

(2) the amount of any part of the income, rights, property or resources of the registered charity that is paid, payable, assigned or otherwise made available for the personal benefit of any person who

(a) is a proprietor, member, shareholder, trustee or settlor of the charity,

(b) has contributed or otherwise paid into the charity more than 50% of the capital of the charity, or

(c) does not deal at arm’s length with a person described in (a) or (b) or with the charity; and

(3) any benefit conferred on a beneficiary by another person, at the direction or with the consent of the charity that would, if it were not conferred on the beneficiary, be an amount in respect of which the charity would have a right.

In our view, the definition of “undue benefit” in subsection 188.1(5) of the Act is non-exhaustive and would also include any benefit conferred on a person that may be considered undue within the ordinary meaning of the term. In this regard, the term “undue” is defined by Black’s Law Dictionary as “excessive or unwarranted”. Moreover, the Oxford English Dictionary, defines “undue” as “going beyond what is appropriate, warranted, or natural…”.

Exclusions

An undue benefit does not include a disbursement or a benefit conferred to the extent that it is,

(a) reasonable consideration or remuneration for property acquired by or services rendered to the charity;

(b) a gift made or a benefit conferred in the course of a charitable act in the ordinary course of the charitable activities of a charity unless it can reasonably be considered that the eligibility of the beneficiary related solely to the relationship of that person to the charity; or

(c) a qualifying disbursement.

A “qualifying disbursement” is defined in subsection 149.1(1) of the Act to mean

a disbursement by a charity, by way of a gift or by otherwise making resources available,

(a) subject to subsection 149.1(6.001) of the Act, to a qualified donee, or

(b) to a grantee organization, if

(i) the disbursement is in furtherance of a charitable purpose (determined without reference to the definition “charitable purposes” in subsection 149.1(1)) of the charity,

(ii) the charity ensures that the disbursement is exclusively applied to charitable activities in furtherance of a charitable purpose of the charity, and

(iii) the charity maintains documentation sufficient to demonstrate

(A) the purpose for which the disbursement is made, and

(B) that the disbursement is exclusively applied by the grantee organization to charitable activities in furtherance of a charitable purpose of the charity.

A “grantee organization” is defined in subsection 149.1(1) of the Act to include a person, club, society, association or organization or prescribed entity, but does not include a qualified donee.

Where an undue benefit has been conferred on a person, subsection 188.1(4) of the Act provides that the charity is liable to a penalty equal to 105% of the value of the undue benefit conferred. The penalty is increased to 110% of the undue benefit if, within the previous five taxation years, the charity was liable to a penalty under this provision.

Accordingly, in our view, an undue benefit within the meaning in subsection 188.1(5) of the Act can include any benefit conferred on a person that may be considered undue within the ordinary meaning of that term as well as the disbursements and benefits described in (1) to (3) above. An undue benefit would not include a disbursement or benefit in whole or in part, that falls within the Exclusions described above.

The determination of whether a charity has conferred an undue benefit on a person can only be made on a case-by-case basis following a review of all the facts and circumstances surrounding a particular situation, including a review of the underlying documentation.

We trust that our comments will be of assistance.

Yours truly,

Bob Naufal
Manager
Financial Institutions Section
for Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch