Private foundations and investment portfolios
August 1, 2002
Private foundations - Whether the management of an investment portfolio constitutes a business activity
To clarify the Directorate's policy regarding business activities.
1. Private foundations are prohibited by paragraph 149.1(4)(a) of the Income Tax Act from becoming involved in any business activity. Several private foundations and other registered charities have substantial investment portfolios and often, the size of their portfolio as well as other considerations can justify their managing these portfolios in-house rather than through a broker.
2. On principle, and by analogy with individual taxpayers carrying on the same activity, managing one's own investment portfolio generally does not constitute a business activity. However, in determining whether the rules of the Act have been infringed, one must look to the facts of each case. There are cases where the extent of the investment activity should be considered in light of the size of the holdings, and the charitable activities engaged in. In determining whether the employment of portfolio managers is necessary for a charity to operate in a prudent manner, one must look to the circumstances of each case such as the size of the investments to be managed, the need to protect the investments from wasting, the trustee's obligation to manage the investments with care, and other activities of the charity.
3. In cases where a registered charity also manages the investment assets of other registered charities at below-market rates, the charity's activity will be construed as "promoting the efficiency of other charities" and will therefore not be considered a business activity.
4. Managing the investments of persons who are not registered charities at below-market rates or in ways that unduly benefit these persons would not be considered to be consistent with the charitable purposes of the charity or with the law.
- Policy statement CPS-026, Guidelines for the registration of umbrella organizations and title holding organizations
- Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, para. 149.1(4)(a)
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