2021-0921671I7 Loanbacks and the application of 118.1(17)

Principal Issues: Whether subsection 110.1(6) applies in a particular scenario to reduce the FMV of a gift to a foundation.

Position: Yes.

Reasons: Pursuant to subsection 118.1(17), the FMV of a property described in subparagraph 118.1(16)(c)(ii) of the Act that has not been applied to a previous gift can be applied to reduce the FMV of a subsequent gift.

Author: Danis, Sylvie
Section: 110.1(6), 118.1(16), 118.1(17), 188.1(7), 188.1(8), 189(7)

                                                                                            July 18, 2022

Technical Audit Section                                                  HEADQUARTERS
Charities Directorate                                                      Income Tax Rulings                                                                                                                           Directorate
Attention: James Wells                                                  Sylvie Danis
Senior Audit Advisor

                                                                                       2021-092167

Loanback provisions – subsection 118.1(17)

We are writing in response to your email dated December 17, 2021 requesting our views with respect to the loanback provisions found in subsections 110.1(6), 118.1(16) and 118.1(17) of the Income Tax Act (Act) to a particular situation you describe in your email.

Briefly, you describe that charitable gifts were made in 2007, as well as 2015 to 2017, by a corporation (the donor) to a registered charity designated as a private foundation. Interest-bearing loans were issued, in 2012 and 2015, by the foundation to the donor and to persons not dealing at arm’s length with the donor, resulting in the use of the foundation’s property to which subparagraph 118.1(16)(c)(ii) of the Act applies.

You have asked whether, pursuant to the ordering rules in subsection 118.1(17) of the Act, the fair market value (FMV) of the gifts made in 2015 to 2017 can be reduced by the outstanding amounts, at those particular times, of the loans made in 2012 and 2015 if no amount has been applied under subsection 118.1(16) of the Act in respect of the loans to reduce the FMV of the 2007 charitable gifts.

Our Comments

In general terms, the Act provides special tax treatment for a particular taxation year for charitable gifts made to qualified donees in the particular taxation year or in the five preceding taxation years (10 preceding taxation years for ecological gifts). If the gift is made by a corporation, section 110.1 of the Act allows the corporation a deduction in computing taxable income. A non-refundable tax credit under section 118.1 of the Act is available if the gift is made by an individual. The tax deduction or credit for purposes of sections 110.1 and 118.1 of the Act is based on the eligible amount of the gift, which is defined in subsection 248(31) of the Act as the amount by which the FMV of the gifted property exceeds the amount of the advantage, if any, in respect of the gift.

Subsection 118.1(16) of the Act provides for the reduction of the FMV 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 FMV of the gift is deemed to be that value otherwise determined minus the FMV of such property so used.

For the purpose of applying subsection 118.1(16) of the Act to determine the FMV of a gift made at any time by a taxpayer, subsection 118.1(17) of the Act applies an ordering rule. In this regard, subsection 118.1(17) of the Act deems the FMV of a property described in subparagraph 118.1(16)(c)(ii) of the Act to be that value otherwise determined minus any portion of the property’s FMV that has been applied under subsection 118.1(16) of the Act to reduce the FMV of another gift made before that time (previous gift) by the taxpayer. By virtue of subsection 110.1(6) of the Act, subsections 118.1(16) and (17) of the Act apply to a gift by a corporation.

In our view, subsection 118.1(17) of the Act does not restrict any portion of a property described in subparagraph 118.1(16)(c)(ii) of the Act, that has not been applied to reduce the FMV of a previous gift, from being applied to reduce the FMV of a gift made in a subsequent year. For example, in the situation you describe, at each particular time the 2007 and 2015 to 2017 gifts were made, the conditions of subparagraph 118.1(16)(c)(ii) of the Act were present with respect to the loans made in 2012, but no portion of such loans was applied to reduce the FMV of the charitable gifts made to the private foundation in 2007. In such situation, the FMV of the unpaid amount of such loans, at each particular time the charitable gifts were made in 2015 to 2017, can be applied to reduce the FMV of those gifts, pursuant to subsections 118.1(16) and 118.1(17) of the Act.

In addition, subsection 188.1(7) of the Act provides that a registered charity, registered Canadian amateur athletic association, or registered journalism organization (collectively referred to as “donee”) is liable to a penalty, equal to 5% of the amount reported on an official donation receipt as representing an amount (Incorrect Amount) which a taxpayer may claim as a deduction under subsection 110.1(1) of the Act or as a credit under subsection 118.1(3) of the Act, if the donee issues the receipt for a gift otherwise than in accordance with the Act and the Income Tax Regulations. Subsection 188.1(8) of the Act increases the amount of the penalty to 10% of the Incorrect Amount reported on the receipt for repeat offences within five years. These penalty provisions can be found in Part V of the Act.

Under subsection 189(7) of the Act, an amount may be assessed at any time, in respect of a liability under Part V of the Act. Once assessed, subsection 189(8) of the Act provides that certain provisions of Part I of the Act relating to returns, assessments, payments and appeals apply to amounts assessed under Part V of the Act, with any modifications that the circumstances require.

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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