2009-0309401I7 Incurring debts to make gifts to qualified donees

Principal Issues: Can a private foundation borrow to make gifts to qualified donees?

Position: No.

Reasons: 149.1(4)(d). Gifts made in charitable activities carried on by a private foundation are mutually exclusive from gifts made to qualified donees.

Author: Danis, Sylvie
Section: 149.1(4)(d), 149.1(4)(b), proposed 149.1(4)(b.1)

                                                                May 8, 2009

Ms. Carole Comtois                                 Sylvie Danis
Technical Policy Advisor                          Charitable and Financial
Institution Charities Directorate,               Sectors
Policy, Planning and
Legislation Division                                   (613) 957-3496

                                                                  2009-030940

Incurring debts to make gifts to qualified donees

This is in response to the February 18, 2009 inquiry forwarded to us requesting our comments on whether indebtedness incurred by a private foundation to make payments to qualified donees would constitute a “debt incurred in the course of administering charitable activities” within the meaning of paragraph 149.1(4)(d) of the Income Tax Act (“ITA”).

Comments

Paragraph 149.1(4)(d) of the Act authorizes the Minister to revoke the registration of a private foundation that has “since June 1, 1950, incurred debts, other than debts for current operating expenses, debts incurred in connection with the purchase and sale of investments and debts incurred in the course of administering charitable activities.”

In the definitions in subsection 149.1(1) of the Act, "charitable foundation" means a corporation or trust that is constituted and operated exclusively for charitable purposes, no part of the income of which is payable to, or is otherwise available for, the personal benefit of any proprietor, member, shareholder, trustee or settlor thereof, and that is not a charitable organization.  In the definitions in subsection 149.1(1), "charitable purposes" includes the disbursement of funds to qualified donees.

Under paragraph 149.1(4)(b) of the Act, a private foundation’s registered status can be revoked if it “fails to expend in any taxation year, on charitable activities carried on by it and by way of gifts made by it to qualified donees, amounts the total of which is at least equal to the foundation's disbursement quota for that year;” (emphasis added)  The making of gifts to qualified donees is thus contrasted with the carrying on of charitable activities.

Under proposed paragraph 149.1(4)(b.1) of the Act, a private foundation’s registered status can be revoked if it makes a disbursement by way of a gift, other than a gift made
(i) in the course of charitable activities carried on by it, or
(ii) to a donee that is a qualified donee at the time of the gift;

This subsection permits the revocation of the registration of a private foundation if it makes gifts (other than gifts made in the course of their charitable activities) to persons or entities that are not qualified donees.  This provision suggests that the making of gifts by a foundation in the course of charitable activities carried on by it, and the making of gifts to qualified donees are two activities that are mutually exclusive.  As such, we are of the opinion that it is not possible for a foundation to make a gift to a qualified donee in the course of carrying on of its own charitable activities.

Opinion

It is our view that debt incurred to gift to qualified donees cannot be considered debt incurred in the course of administering charitable activities for purposes of paragraph 149.1(4)(d).

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We trust that these comments will be of assistance.

Yours truly,

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

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