CRA Technical Interpretation Regarding Loanbacks by a qualified Donee

January 2020 Charity & NFP Law Update

Theresa L.M. Man

On October 7, 2019, the CRA released its technical interpretation CRA View 0801871I7, in which it addressed the question of whether subsections 110.1(6) and 118.1(16) of the ITA apply to reduce the fair market value of a gift in two scenarios. In the first scenario, a corporation makes a gift to a private foundation and, within 60 months after making the gift, the private foundation loans funds to the same corporation (where the corporation makes interest-only payments in accordance with a loan agreement) and to an individual who does not deal at arm’s length with the corporation. In the second scenario, a private foundation loans funds to multiple corporations which do not deal at arm’s length with each other (with interest-only payments made by the corporations pursuant to the terms of various promissory notes) and, within 60 months after the issuance of the promissory notes but prior to repayment, the corporations make gifts to the private foundation. In both scenarios, the loans are repaid within 60 months after the time of the gifts.

These scenarios are in relation to the application of complex loanback rules involving gifts to private foundations. In general, a loanback occurs when a donor makes a gift to a qualified donee and within 60 months of making the gift any of the following situations occur: (i) the qualified donee holds a non-qualifying security of the donor that it acquired after the time that is 60 months before the gift was made, and (ii) the donor (or a person or partnership not dealing at arm’s length with the donor) uses the qualified donee’s property under an agreement that was made or modified after the time that is 60 months before the gift was made and the property was not used by the qualified donee in its charitable activities. Under these situations, the fair market value of the gift for income tax purposes would be reduced by the fair market value consideration for the non-qualifying security or the fair market value of the property used. A non-qualifying security is, generally, a security where the owner of the security is not at arm's length with the issuer of the security. 

The CRA document explains the application of these complex loanback rules to two scenarios referred to above. The CRA confirmed that both these scenarios would be caught by these rules so that the fair market value of the gift involved in each scenario would be reduced by reason of the fact that, within 60 months of the time of the gift, the donor or non-arm’s length person uses property of the charity under an agreement that was made or modified after the time that is 60 months before the time of the gift.

The CRA stated that where multiple non-arms’ length donors are involved, the applicable ITA provisions would apply to each donor separately. As well, where multiple non-arms’ length donors each make a gift to a qualified donee and an amount is loaned by the qualified donee to one or more of these donors, the total amount of the loans will be taken into account to reduce the fair market value of the gift made by each of the donors. In these scenarios, the CRA indicates that the fair market value of a gift would be reduced by the unpaid balance at the time of the gift, of any loan advanced by the private foundation to the donor (or to non-arm’s persons or partnerships) prior to the time of the gift pursuant to an agreement entered into in the 60 months prior to the time of the gift. These rules also apply to new loans provided by the private foundation to the donor (or to non-arm’s persons or partnerships) within 60 months after the time of the gift. 

Finally, the CRA clarified that the fact that a borrower pays interest pursuant to the terms of the loan agreements is not relevant in these scenarios and that the ITA rules do not provide for the reinstatement of a gift in the event the property used by the donor (or non-arm’s persons) is returned (or repaid) to the qualified donee.

Read the January 2020 Issue

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Advisory Committee on the Charitable Sector Holds December Meetings
Legislation Update
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-   2020 Budget Consultations in Ontario
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-   Nova Scotia's Plastic Bags Reduction Act
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Corporate Update
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-   Updated Policies on Corrections of Articles or a Certificate for Business and Not-for-Profit Corporations
-   Corporations Canada Makes Changes for Online Services to Not-for-Profits
-   Certain Amendments to Ontario's Co-operative Corporations Act in Force
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Voluntary Association's Constitution and By-Laws Found to be Contractual
Tax Court Decision on Split Receipting and Donative Intent Upheld on Appeal
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CRA Technical Interpretation Regarding Loanbacks by a Qualified Donee
CRA Technical Interpretation on Prescribed Rates and Undue Benefits
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Anti-Terrorism/Money Laundering Update
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Charities Legislation & Commentary, 2020 Edition Now Available