Section 188.1

Subsection 188.1(1) - Penalty — carrying on business


Joyce A. Young, H. Michael Dolson, "Income Tax Consequences of Carrying on an Unrelated Business", Business Vehicles, Volume XV, No. 1, 2012, p. 782, at 783, 784-785

The Minister's stated administrative position is that the nature and extent of services provided for, or made available to, tenants are important determinants of whether a particular rental activity is a leasing business. [fn. 8: Technical Interpretation 2005-0095001E5, dated February 22, 2005.] Services that are indicative of the existence of a business of earning rental income include services such as the cleaning of the rented premises, provision of parking attendants or security guards, the provision of meals and drinks to tenants, and the provision of a mail distribution service. If the services provided are limited to the basic maintenance of rental property and the provision of services necessary to allow occupation of the building (i.e., heating and air conditioning), the activity is likely passive and not a business. [fn. 9: Technical Interpretation 2011-0403841E5, dated July 18, 2011.]

In some circumstances, it appears that the Minister will look to the level of services provided by the charitable landlord to determine whether the rental activity is a leasing business, even where the existence of a business could be determined by reference to human activity. For example, the Minister has opined that the services test would be used where a church is undertaking the development of rental properties in order to generate an income stream, [fn. 10: Supra note 8.] or where a hospital foundation acquires and leases up to 10 residential properties adjacent to a hospital, with management provided by an arm's length property management company. [fn. 11: CRA Document October 1991-289, dated October 1991 involving 10 residential properties.] …

There appears to be some consensus between the Minister and the academic commentators that the carrying on of a business by a trust established for the benefit of a charity does not constitute a business of the charity.…

The better view of the law is that the business carried on by a trust is a business of the trustees and not a business of the trust beneficiaries. This is consistent with the wording of subsection 104(1), which provides that a reference to a trust is a reference to the trustee of the trust, and with the recent decision in Garron v. R., [fn. 17: Garron v. R., [2012] 1 S.C.R. 520 (S.C.C.) at paragraph 10, affirming 2010 DTC 5189 (F.C.A.), affirming 2009 DTC 1287 (T.C.C.).] where the Supreme Court of Canada implied that a trust had a separate existence as an individual for the purposes of the Act by virtue of subsection 104(2).…

At the very least, the use of a subsidiary trust has the tacit approval of the Minister. The Minister has opined that, having regard for paragraph 104(5)(a), the income earned by a trust from a rental activity and allocated to a beneficiary that is a private foundation will be income from property, and that the business of the trust will not be the business of the beneficiary if the beneficiary is not active in the business. [fn. 22: Technical Interpretation 9703865, dated March 5, 1998.]

Subsection 188.1(3.1)


Simon Cheung, "Private Foundations: Exceeding the 20 Percent Limit", Canadian Tax Focus, Vol. 9, No. 2, May 2019, p. 5

Eliminating the s. 188.1(3.1) penalty for a positive divestment obligation percentage (DOP)

[A] penalty is assessed for any year in which the private foundation has a positive DOP.

Gifting the shares to a public foundation or a charitable 'organization might solve the problem, since those types of entities are not subject to the excess corporate holdings regime….The problem could also be avoided by converting the private foundation into a public foundation.

Another possibility is requesting a reallocation of the DOP to a subsequent taxation year (up to 10 years) under subsection 149.2(6). This reallocation is possible only if the minister believes that it would be just and equitable.

[S]elling the shares back to the issuing corporation may not be possible if the corporation does not have sufficient liquidity….

CRA position on interpretation of “interest” in s. 188.1(3.2)

[A]nother idea … is for the corporation to redeem the shares with the compensation being a promissory note. However, subsection 188.1(3.2) states that if a private foundation enters into a transaction to avoid a DOP by substituting shares for "an interest (or for civil law, a right), in a corporation other than shares," then for this purpose such interest is deemed to have been converted back into shares at their FMV. Is the debt considered an “interest”…? In a technical interpretation … the CRA takes [that] interpretation.

Subsection 188.1(3.2)

Administrative Policy

12 December 2018 Interpretation Letter of the CRA Charities Directorate to Simon Cheung File GC 341217

debt is an "interest in a corporation, other than shares”

The Charities Directorate stated the following respecting a proposal to eliminate a foundation's positive divestment obligation percentage arising from having exceeded the 20% limitation (giving rise to an excess corporate holding percentage):

We understand that the foundation, a registered charity, has been bequeathed with shares of a private corporation (the corporation), and the foundation now plans to dispose of these shares to the corporation, in exchange for a promissory note lo pay for the shares by the corporation. We also understand that the plan is being considered in connection with the foundation's divestment obligation for excess corporate holdings.

You ask whether the "Interest*' that will be held by foundation in the corporation, as a result of the above plan, falls within the “direct or indirect interest in a corporation, other than shares” referred to in subsection 188.1(3.2). You also ask whether the said interest is limited to some form of participating equity interest in the corporation, such as stock options or other rights to acquire shares.

We find no specific or comprehensive definition of the above "interest" in the Act. As such, we take the said term to include (in a broad, general sense) any right to have the advantage accruing from anything, and any right in the nature of property (such as a right of a creditor for repayment from the debtor's assets, as in the foundation's case), and not limited to stock options or other rights to acquire shares (and those that come with owning the shares).

Words and Phrases

Subsection 188.1(4)

Administrative Policy

5 December 2019 Internal T.I. 2017-0683831I7 - Prescribed Rates and Undue Benefits

the making of a loan at the prescribed rate under s. 189(1) does not prelude a penalty under s. 188.1(4)

The Charities Directorate was encountering situations where a registered charity that is a private foundation makes a loan at the prescribed rate of interest where the loan recipient receives the loan because of that debtor’s relationship with the private foundation or the foundation’s board of directors. Can that foundation be subject to a penalty for undue benefits under s. 188.1(4) in respect of the loan where the non-qualifying interest (NQI) rules in s. 189(1) do not apply to it? Headquarters responded:

[G]iven that subsection 189(1) of the Act and subsection 188.1(4) of the Act apply to different parties, each of these provisions must be considered independently of each other. The fact that a particular taxpayer may not be subject to a tax under subsection 189(1) of the Act in respect of a loan received from a registered charity does not, in and of itself, preclude the charity from being assessed a penalty under subsection 188.1(4) of the Act where the facts and circumstances establish that the loan is an undue benefit conferred on the particular taxpayer.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 189 - Subsection 189(1) use of prescribed rate does not insulate lender foundation from undue benefit rules 87

Subsection 188.1(7) - Incorrect information

Administrative Policy

Cathy Hawara, Director General, Charities Directorate, "The CRA Charities Directorate's Approach to Compliance", 2014 Conference Report, Canadian Tax Foundation, 37:1-10


Penalty for incorrect information (overview) (p. 37:6)

Every registered charity that issues, in a taxation year, a receipt for a gift otherwise than in accordance with the Act and its regulations is liable to a penalty equal to 5 percent of the eligible amount of the gift. This penalty can be imposed for missing information, incorrectly recorded values, incorrect dating of the gift, or an incorrect donor name. For subsequent infractions, the penalty increases to 10 percent.

Subsection 188.1(9) - False information

Administrative Policy

Cathy Hawara, Director General, Charities Directorate, "The CRA Charities Directorate's Approach to Compliance", 2014 Conference Report, Canadian Tax Foundation, 37:1-10


Penalty for false information – fraudulent receipting also often results in revocation or criminal charges (pp. 37:6-7)

A person who makes or participates in the making of a false statement on a receipt is liable to a penalty equal to 125 percent of the eligible amount. This penalty can be imposed for fraudulent receipts—that is, receipts that the person knew, or would reasonably be expected to know, recorded incorrect information. If the total penalty exceeds $25,000, the result is mandatory suspension of the tax-receipting privileges of the charity.

Since 2004, the Charities Directorate has screened more than 200 files for audit where there was a suspicion of fraudulent receipting. To date, 188 audits have been completed, and 97 registrations have been revoked for cause. Numerous cases have been referred to CRA Enforcement for the potential laying of criminal charges.