Non-qualified investments

Overview

A non-qualified investment of a private foundation means a debt, share, or a right to acquire a share held by a private foundation that was issued by various persons or individuals linked to that foundation. If the foundation does not receive interest or dividends equal to the minimum amount, that issuer is liable for a tax equal to the amount of the shortfall.

Note

These are complex provisions. If necessary, advice from legal or accounting experts is recommended.

What is a non-qualified investment?

A non-qualified investment is:

(a) a debt, other than a pledge, owing to the foundation by a person (other than an excluded corporation) who:

 (i) is a member, shareholder, trustee, settlor, officer, official, or director of the foundation (or persons who do not deal at arm’s length with any of these individuals),

(ii) individually, or as a member of a group of persons who do not deal with each other at arm’s length, who contributed more than 50% of the foundation’s capital (or persons who do not deal at arm’s length with any of these persons) or

(iii) is a corporation controlled by the foundation, by any person or group of persons referred to in (i) or (ii) above, by the foundation and any other private foundation it does not deal at arm’s length with, or by any combination thereof,

(b) a share held by the private foundation in a corporation (other than a share of an excluded corporation) described in (a)(iii), or

(c) a right held by the foundation to acquire a share referred to in (b).

Note 

Shares listed on a designated stock exchange or any shares prescribed by the Income Tax Regulations section 6203 are not considered to be non-qualified investments.

What is an excluded corporation?

An excluded corporation is:

  • a limited-dividend housing company;
  • a corporation whose issued shares are all held by the private foundation; or
  • a corporation whose entire property is used by a registered charity in its administration or in carrying on its charitable activities. 

What are the tax implications for the issuer of the non-qualified investment? 

If the private foundation receives interest or dividends below the minimum amounts required for the non-qualified investment, the issuer is liable for a tax equal to the amount of the shortfall. The tax payable is calculated by completing Form T2140, Part V Tax Return – Tax on Non-Qualified Investments of a Registered Charity.

References

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