21 October 2005 Internal T.I. 2005-0154751I7 - Debts incurred by charitable foundations

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: Whether debts incurred by public or private foundations for the purpose of acquiring investments are acceptable debts.

Position: We have revised our position such that a debt incurred for the purpose of acquiring investments would be viewed as a "debt incurred in connection with the purchase and sale of investments" for purposes of paragraphs 149.1(3)(d) and (4)(d).

Reasons: It had been our view that the phrase "debts incurred in connection with the purchase and sale of investments" should be interpreted strictly. However, we reconsidered our position XXXXXXXXXX . We informed the Department of Finance of our revised position and they advised that they are no longer concerned if a charitable foundation borrows to acquire an investment.

 							October 21, 2005

	HEADQUARTERS						HEADQUARTERS
Charities Directorate						Income Tax Rulings
Rhéal Dorval, Deputy Director					  Directorate
	Compliance Section						J. Leigh
					952-1505

								2005-015475

Debts Incurred by Charitable Foundations

We are writing further to our meeting of September 29, 2005 concerning the above-noted issue.

In a memorandum to you dated June 30, 2005, we discussed the meaning of the phrase "debts incurred in connection with the purchase and sale of investments" in paragraphs 149.1(3)(d) and (4)(d) of the Income Tax Act. It had long been our position that this phrase should be interpreted fairly strictly. We previously expressed the view that the type of debt contemplated by this phrase would be a miscellaneous type of debt such as brokerage fees or other incidental amounts that could be incurred on either the purchase or sale of an investment. Accordingly, the incurring of a debt by a charitable foundation to acquire an investment could result in its registration status being revoked under paragraph 149.1(3)(d) or (4)(d), as the case may be.

XXXXXXXXXX. Jurisprudence has confirmed that the phrase "in connection with" has a very broad meaning (see the Supreme Court of Canada commentary in that regard in Nowegijick v. The Queen (1983 DTC 5041)). XXXXXXXXXX. That regulation contemplates a debt incurred by a charitable foundation in respect of the acquisition of an interest in real property and provides relief to the foundation in computing its disbursement quota. XXXXXXXXXX, we have revised our position. We now think the better view is that debt incurred for the purpose of acquiring an investment is "debt incurred in connection with the purchase and sale of investments" for the purposes of paragraphs 149.1(3)(d) and (4)(d).

XXXXXXXXXX

Based on the above, the fact that a charitable foundation incurs debt to acquire an investment would not, in and of itself, be grounds for revocation. However, auditors should still consider debt arrangements particularly those involving non-arm's length parties to ensure there are no other issues, such as personal benefit. In this regard, interest-free loans from the foundation's directors or members to enable the foundation to acquire investments, pay current operating expenses or expend on charitable activities should generally not be of concern. The borrowed money increases the investments capital and therefore gives rise to a disbursement quota requirement. The lender is not entitled to a charitable donations tax credit until such time as all or a portion of the debt is forgiven. This type of arrangement is commonly used where the lender does not have sufficient income to make full use of the tax credit in the year. There is, of course, no tax credit if the loan is repaid by the foundation.

We trust that these comments will be of assistance.

F. Lee Workman
Charitable and Financial Institution Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch

c.c. Terry De March, Charities Directorate

Ed Short, Department of Finance