2019-0801871I7 Loanbacks

Principal Issues: Whether subsections 110.1(6) and 118.1(16) apply in two particular scenarios to reduce the fair market value of the gift.

Position: Yes.

Reasons: 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.

Author: Danis, Sylvie
Section: 110.1(6), 118.1(16)

                                                                 October 7, 2019

Technical Audit Section                            HEADQUARTERS
Charities Directorate                                 Income Tax Rulings
                                                                  Directorate
Attention: James Wells                             Sylvie Danis
Senior Audit Advisor                                 (613) 670-9047

                                                                  2019-080187

Loanback provisions – subsection 118.1(16)

We are writing in response to your March 25, 2019 request for our views regarding the application of the loanback provisions found in subsection 118.1(16) of the Income Tax Act (Act) to two situations described in your request.

Briefly, in the first situation, a corporation makes a gift to a private foundation at a particular time and within 60 months after the particular time, the foundation loans funds to that corporation and to an individual who does not deal at arm's length with the corporation. The corporation makes interest-only payments pursuant to the terms of a loan agreement.

In the second scenario, a private foundation loans funds to multiple corporations that do not deal at arm’s length with each other. The loans are evidenced by way of promissory notes with interest-only payments made by the corporations pursuant to the terms of the promissory notes. Within 60 months after the issuance of the promissory notes and prior to the repayment of the notes, the corporations make gifts to the foundation.

In both scenarios, the loans are repaid within 60 months after the time of the gift(s).

You have asked whether subsections 118.1(16) and 110.1(6) of the Act would apply to reduce the fair market value of a gift by the amount of the loans.

Our Comments

Section 110.1 of the Act allows a corporation to claim a deduction within certain limits, in computing its taxable income, for the eligible amount of a gift made to a qualified donee. The eligible amount of a gift is defined as the amount by which the fair market value of the property that is the subject of a gift exceeds the amount of the advantage, if any, in respect of the gift. The definition of qualified donee in subsection 149.1(1) of the Act includes registered charities that are private foundations.

Subsection 118.1(16) of the Act provides for the reduction of the fair market value of a gift for purposes of determining an individual’s charitable tax credit under section 118.1 of the Act where at any particular time, an individual makes a gift of property, and the following conditions as described in subparagraph 118.1(16)(c)(ii) of the Act are present:

a)    within 60 months after the particular time, the individual or any person or partnership with which the individual does not deal at arm's length uses property of the donee under an agreement that was made or modified after the time that is 60 months before the particular time (i.e., the time of gift); and

b)    the use of the property by the individual (or non-arm’s length person or partnership) was not in the course of carrying on of the donee's charitable activities.

In such circumstances, the fair market value of the gift is deemed to be that value otherwise determined minus the fair market value of such a property so used. By virtue of subsection 110.1(6) of the Act, subsection 118.1(16) of the Act applies to a corporation to deem the fair market value of a gift by a corporation to be that gifted property’s value otherwise determined minus the total fair market value of the donee’s property used by the corporation (or non-arm’s length person or partnership).

Subsection 118.1(17) of the Act applies an ordering rule for the purpose of applying subsection 118.1(16) of the Act to determine the fair market value of a gift made at any time by a taxpayer. Specifically, subsection 118.1(17) of the Act provides that the fair market value of a property described in subparagraph 118.1(16)(c)(ii) of the Act is deemed to be that value otherwise determined minus any portion of the property’s fair market value that has been applied under that subsection to reduce the fair market value of another gift made before that time by the taxpayer.

Subsection 118.1(17) of the Act applies on a taxpayer by taxpayer basis and applies to corporations by virtue of subsection 110.1(6) of the Act. Where multiple taxpayers make a gift to a qualified donee and persons with which these taxpayers do not deal at arm's length use property of the donee, the provision will be applied to each donor separately. Accordingly, where multiple donors who do not deal at arm's length with each other each make a gift to a qualified donee and an amount is loaned by the 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.

Whether or not the fair market value of a gift could be reduced pursuant to subsections 110.1(6) and 118.1(16) of the Act involves a review of the facts and circumstances of each situation. In our view, subsections 118.1(16) and 110.1(6) of the Act apply to reduce the fair market value of a gift by a donor to a private foundation, by the unpaid balance at the time of the gift, of any loan advanced by the foundation to the donor (or to persons or partnerships who do not deal at arm's length with the donor) prior to the time of the gift pursuant to an agreement entered into in the 60 months prior to the time of the gift. Subsections 118.1(16) and 110.1(6) of the Act also apply to any new loan provided by the foundation to the donor (or to persons or partnerships who do not deal at arm's length with the donor) within 60 months after the time of the gift. Moreover, the fact that a borrower pays interest pursuant to the terms of the loan agreements is of no consequence in determining whether subsections 118.1(16) and 110.1(6) of the Act apply to a particular situation.  Furthermore, it should be noted that the Act does not provide for the reinstatement of a gift for purposes of subsections 110.1(6) and 118.1(16) of the Act in the event the property used by the donor or person not dealing at arm's length with the donor is returned (or repaid) to the donee.

We hope these comments will be of assistance. Please do not hesitate to contact us if you have any further questions.

Yours truly,

Bob Naufal
Manager
Financial Institutions Section
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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