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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: The church is proposing to incorporate a wholly-owned taxable subsidiary to which it will transfer, at FMV, real estate for debt. The subsidiary will develop the real estate and rent it for profit. The subsidiary plans to make the maximum charitable donation each year to the church that would qualify for a tax deduction (which it expects would be 75% of its income) and return any excess profit as dividends. The charity will fund the subsidiary on a go-forward basis by making loans to the subsidiary. The church wishes confirmation that the subsidiary will be able to deduct its interest payments to the church in computing its income, that it may claim the charitable tax deduction each year for its maximum donation and that there will be no tax consequences to the church from the proposed transaction.
Position: It is not possible to give the requested comfort.
Reasons: First, confirmation of tax implications can only be made in the context of an advance tax rulings. Second, it is possible that subsections 110.1(6) and 118.1(16) would apply to reduce or eliminate any deduction claimed by the subsidiary in respect of funds periodically donated. Third, it is unclear whether interest would be deductible to the subsidiary under these circumstances. Fourth, it is not clear that it is appropriate for the church to fund the subsidiary in view of its status as a charitable organization.
July 10, 2000
Mr. Carl Juneau HEADQUARTERS
Assistant Director R. Maley
Technical Interpretation and (957-9226)
Communications Section
Charities Division
Attention: Frank Fotia
2000-002705
XXXXXXXXXX
This is in reply to your letter by facsimile transmission dated May 18, 2000 requesting our comments on a request by the above named church for a "comfort letter" that the proposed transaction will not affect its charitable status and that certain tax treatment be confirmed. Our understanding of the relevant facts are as follows.
The church is proposing to incorporate a wholly-owned taxable subsidiary to which it will transfer, at FMV, real estate for debt. The subsidiary will develop the real estate and rent it for profit. The subsidiary plans to make the maximum charitable donation each year to the church that would qualify for a tax deduction (which it expects would be 75% of its income) and return any excess profit as dividends. The charity will fund the subsidiary on a go-forward basis by making loans to the subsidiary.
The church wishes confirmation that the subsidiary will be able to deduct its interest payments to the church in computing its income, that it may claim the charitable tax deduction each year for its maximum donation and that there will be no tax consequences to the church from the proposed transaction.
Written confirmation of the tax implications of proposed transactions are not given by the CCRA unless the transactions are the subject matter of an advance ruling request. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996.
However, for your information we have the following general comments as to some issues that we believe are raised by the proposed structure that would have to be considered before giving any such confirmation should an advance tax ruling be requested.
First, the proposed loan funding of the taxable subsidiary by the church on a go-forward basis, may constitute a "loan-back" within the meaning of 118.1(16) of the Act, which could reduce or eliminate the charitable tax deduction the subsidiary proposes to take from time to time by virtue of subsection 110.1(6). It is unclear whether any interest paid by the subsidiary on funds "loaned-back" to it as proposed would be deductible.
Second, while it is the responsibility of Charities Directorate to assess whether the transaction is appropriate given the church's status as a charitable organization, we would question whether the funding of the taxable subsidiary is a proper devotion of the church's funds. In this respect, we note the definition of "charitable organization" in subsection 149.1(1) of the Act and the provision defining the devotion of resources to charitable activities in subsection 149.1(6).
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (613) 994-2898. A copy will be sent to you for delivery to the client.
F. Lee Workman
Manager
Financial Institutions
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
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