In the first situation, a corporation makes a gift to a private foundation and within the following 60 months, the foundation makes interest-bearing loans to that corporation and to an individual not dealing at arm's length with the corporation that are repaid within 60 months.
In the second scenario, a private foundation makes interest-bearing loans (also repaid within 60 months) to multiple corporations not dealing at arm’s length with each other. Within 60 months thereafter, the corporations make gifts to the foundation.
Would ss. 118.1(16) and 110.1(6) apply to reduce the fair market value of the gifts by the loan amounts? CRA responded:
Subsection 118.1(17) of the Act applies on a taxpayer by taxpayer basis and applies to corporations by virtue of subsection 110.1(6) of the Act. Where multiple taxpayers make a gift to a qualified donee and persons with which these taxpayers do not deal at arm's length use property of the donee, the provision will be applied to each donor separately. Accordingly, where multiple donors who do not deal at arm's length with each other each make a gift to a qualified donee and an amount is loaned by the donee to one or more of these donors, the total amount of the loans will be taken into account to reduce the fair market value of the gift made by each of the donors.
[S]ubsections 118.1(16) and 110.1(6) … apply to reduce the fair market value of a gift by a donor to a private foundation, by the unpaid balance at the time of the gift, of any loan advanced by the foundation to the donor (or to persons or partnerships who do not deal at arm's length with the donor) prior to the time of the gift pursuant to an agreement entered into in the 60 months prior to the time of the gift. Subsections 118.1(16) and 110.1(6) of the Act also apply to any new loan provided by the foundation to the donor (or to persons or partnerships who do not deal at arm's length with the donor) within 60 months after the time of the gift. … [T]he Act does not provide for the reinstatement of a gift for purposes of subsections 110.1(6) and 118.1(16) of the Act in the event the property used by the donor or person not dealing at arm's length with the donor is returned (or repaid) to the donee.