Program-related investments (PRI) - Segment 3

Transcript

Welcome to Program-Related Investments (PRI), part of the Community Economic Development Activities and Charitable Registration (Guidance CG-014) webinar.

Program-related investments (PRI)

As mentioned previously, the expansion of the PRI section is the biggest change to the guidance. For our purposes, a PRI is an activity that directly furthers the investor charity's charitable purposes.

We've identified four common type or forms of PRIs which are:

  • loans;
  • loan guarantees;
  • share purchases; or
  • leases of land or buildings.

A PRI is not an investment in the conventional financial sense. While PRIs may generate a financial return, they are not made for that reason. A PRI usually involves the return, or potential return, of capital (funds or property) within a set period of time, but this is not a requirement.

A PRI may also yield additional revenue for the investor charity (such as interest), but the yield of additional revenue can be below market rates.

Here's an example of a Program-related investment:

A charity that has a purpose to relieve unemployment of individuals who are unemployed or facing a real prospect of imminent unemployment and are shown to need assistance by providing job skills training makes a PRI in the form of a low-interest loan to a not-for-profit entity (unconnected to the investor charity and a non-qualified donee). The not-for-profit entity provides job-training programs on the charity's behalf. This PRI is based on a written agreement that the funds are used only to provide training to the participants who meet the investor charity's appropriate eligibility criteria. The terms of the agreement include ongoing monitoring and reporting provisions to ensure the charity maintains the necessary direction and control over its activity.

Requirements for PRIs

We've outlined the requirements for program related investments in the guidance.

The following are the key points:

  1. All PRIs must directly further a charity's stated charitable purposes. This is standard for all activities, however, we wanted to highlight the difference between PRIs and regular investments. If a charity provides start-up loans to businesses, they must show how they are furthering their charitable purpose. Start up loans to promote business development, entrepreneurship or market development are generally not charitable.
  2. If the PRI is made to a qualified donee, there are no other requirements.
  3. If the PRI is made to a non-qualified donee, the investor charity must prove that the arrangement meets the “own activities” requirements of the Income Tax Act.

This means that the investor charity must be able show that it maintains direction and control over the programs.

A charity that makes a PRI to a non-qualified donee must be able to show that any private benefit is incidental. This means that it must be necessary, reasonable and not disproportionate to the resulting public benefit.

Requirement for PRIs - Other

The investor charity must ensure it has appropriate exit mechanism in place to allow it to:

  • withdraw from a PRI; or
  • convert the PRI to a regular investment, if the PRI no longer furthers its charitable purposes.

For example, a charity may be running a training business that becomes successful and start earning more income than anticipated. The investor charity could then restructure the business so that it meets the related business requirements or create an independent business as appropriate.

The charity should have a written policy or other documentation explaining the relationship of each PRI to its purposes, and setting out the criteria or parameters it applies when making PRI decisions.

If the PRI involves funding a non-qualified donee, supporting documentation to establish the necessary direction and control as outlined in paragraphs 47 and 48 of the guidance, should form part of the charity's books and records because the Charities Directorate may ask to see it during the application or audit processes.

For information about the types of arrangements an investor charity can use to establish the necessary direction and control, see the sections relating to working with intermediaries in the Guidance CG-002, Canadian registered charities carrying on activities outside Canada, and Guidance CG‑004, Using an intermediary to carry on a charity's activities within Canada.

The charity must also ensure that its PRIs meet all applicable trust, corporate, and other legal or regulatory requirements.

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