CRA Deals with DQ Examples

By Arthur Drache

The CRA, in answer to a couple of hypothetical situations posed to it sought to explain the impact of major gifts which are transferred between charities.[1]

The two factual queries were as follow.

(1)    A registered charity (the "Donor Charity") plans to gift real property that is used in its charitable activities to another registered charity that is a related charitable foundation (the "Recipient Charity").  The value of the real property is $10 million.  Assume that the Donor Charity will otherwise meet its disbursement quota for the year irrespective of the gift of the real property and that the full value of the real property will be designated by the Donor Charity as a "designated gift". 

The question was whether the CRA would confirm that the Recipient Charity will not have an obligation to expend any portion of the value of the designated gift in addition to its existing disbursement quota for the year.

(2)   Assume the same facts as in the first scenario except that the Donor Charity will have a deficiency of $100,000 in its disbursement obligation without taking into account the gift of real property.  The Donor Charity intends to use this portion of the value of the gifted property to meet its disbursement quota and designate the remaining value of $9,900,000 as a "designated gift". 

The request was whether  the CRA would give confirmation that the Recipient Charity would then have an obligation to expend $100,000 by the end of its next taxation year, in addition to any disbursement obligation it might have on its own account.

The verbatim responses were as follow:

"With regard to the first scenario, since the Donor Charity will designate the full value of the gifted property as a designated gift, the Donor Charity will be precluded from using the designated gift to satisfy its disbursement quota by virtue of the deeming rule in subsection 149.1(1.1) of the Act.  The Recipient Charity will not be subject to the immediate disbursement requirement in respect of the designated gift due to the exclusion for designated gifts contained in proposed paragraph 149.1(4.1)(d) of the Act. 

Under the second scenario, since the Donor Charity is designating a portion of the gifted property as a designated gift, the portion not so designated may be used to meet the Donor Charity's disbursement quota.  Only the designated portion of the gifted property will not be subject to the immediate disbursement requirement set out in proposed paragraph 149.1(4.1)(d) of the Act.  Therefore, in addition to any disbursement obligation the Recipient Charity might have on its own account, it would have an obligation to expend $100,000 in carrying out its own charitable activities or by way of gifts to qualified donees with which it deals at arms length in the current or subsequent taxation year. 

The response goes on with a warning.

"We note that the proposed amendments to paragraph 149.1(4.1)(a) and existing paragraph 149.1(4.1)(b) of the Act can subject donor and recipient charities to revocation of their registration if it may reasonably be considered that a purpose of the transaction was to avoid or unduly delay the expenditure of amounts on charitable activities.  Whether any purpose of a transaction is to avoid or unduly delay the expenditure of amounts on charitable activities is a question of fact and must be determined on a case-by-case basis. "

The letter goes on to end with a useful caveat to the effect that the opinions given are not binding.