7 August 2000 External T.I. 1999-0007055 - CAPITAL 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.

Principal Issues: We are asked whether following types of gifts would be viewed as "contributions or other payments of capital to the organization" for the purposes of that paragraph. The first type of gift is "contributions or loans" made to the organization by non-arms length individuals to enable the organization to meet its operating expenses. The second type of gift is a gift by will, or by beneficiary designation, of the guaranteed residual portion of an annuity that was payable to the donor during his or her lifetime. The third type of gift is the forgiveness, by will, of debt owing by the organization to the donor.

Position: It is possible for loan funding to form part of a charity's capital. If a charity has a specific concern about the amount of its indebtedness held by one or more individuals, it should contact the Charities Directorate. Any gift by will that is specifically excluded from the charity's income under subparagraph (i) of the definition of a charity's income in paragraph 149.1(12)(b) forms part of the charity's capital. We would generally not distinguish between a gift of property by will and a forgiveness of debt by will in this respect. We are not in a position to comment on "gifts" by way of beneficiary designation.

Reasons: In general, income and capital are said to be mutually exclusive terms. The income of a charity is defined in paragraph 149.1(12)(b). Amounts that are not included in the charity's income under this paragraph (or under section 9) form part of the charity's capital. The 2000 Budget included a proposal respecting "gifts" by way of beneficiary designation; however, as no legislation is in force in that respect, we are not in a position to provide comments. Under the current law, a donation by way of beneficiary designation is not a gift for tax purposes.

XXXXXXXXXX 						1999-000705

Attention: XXXXXXXXXX

August 17, 2000

Dear Sir:

Re: Subsection 149.1(1) - "charitable organization"

This is in reply to your letter dated October 12, 1999 requesting our views as to the application of paragraph (d) of the definition "charitable organization" in subsection 149.1(1) of the Income Tax Act in three types of situations. In particular, you would like us to confirm that the following types of gifts would not be viewed as "contributions or other payments of capital to the organization" for the purposes of that paragraph.

The first item is "contributions or loans" made to the organization by non-arms length individuals to enable the organization to meet its operating expenses. The second item is a gift by will, or by beneficiary designation, of the guaranteed residual portion of an annuity that was payable to the donor during his or her lifetime. The third situation is the forgiveness, by will, of debt owing by the organization to the donor.

As we understand it, your view is that the term "capital" in paragraph (d) of the definition "charitable organization" refers only to gifts that are subject to an endowment.

We are unable to consider transactions involving specific taxpayers in a general letter of opinion. If the situation present is pursuant to a completed transaction involving specific taxpayers, you may refer this matter to your Tax Services Offices. If the situation present is in contemplation of a proposed transaction involving specific taxpayers, you may request an advance income tax ruling in accordance with the guidelines set out in Information Circular 70-6R3.

We can, however, provide you with the following general comments.

Paragraph 149.1(12)(b) defines which gifts received by a charity in the year constitute income to the charity. It is our view that any gift received by a charity in the taxation year that would be specifically excluded from its income under that paragraph would be a gift of capital to the charity. Thus, a gift subject to endowment or a gift by will that is excluded from the charity's income under that paragraph would form part of the charity's capital. In the latter respect, we would generally not distinguish between a gift of property and a forgiveness of debt under the terms of a will.

We are also of the view that loan funding could form part of a charity's capital. If a charity has a specific concern about the amount of its indebtedness held by one or more individuals, we recommend that it contact the Charities Directorate of the Canada Customs and Revenue Agency to discuss the matter. Inquiries to the Charities Directorate made be directed to 1-800-267-2384 or 1-613-954-0410.

We are not in a position to provide comments at this time with respect to amounts that are "given" to a charity by way of beneficiary designation. Generally, amounts that accrue to a charity by way of beneficiary designation would not be viewed as a "gift" for the purposes of the Income Tax Act. However, you may be aware that the 2000 Federal Budget included a proposal respecting donations made to charity by way of beneficiary designation. As no legislation is in force in respect of this announcement, we are not in a position to comment on its potential application. If you should have any questions about this proposal, you may wish to contact the Department of Finance directly.

Although the foregoing comments are not binding on the Canada Customs and Revenue Agency, we trust they assist.

Yours truly,

F. Lee Workman
Manager
Financial Institutions
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch