Loaned Funds Can Serve Many Purposes
by Arthur Drache, C.M. Q.C.
It was one of those mornings where for no discernible reason a discussion on one topic was given a different spin from a completely different source.
The original discussion we had was about the possibility of members of a charitable organization making interest free loans to the charity in situations where conventional lenders would not help or where interest rates which would be charged are too high.
We pointed out that twenty five years ago when mortgage rates were in the high double digits many organizations looked to their members for such loans to avoid conventional mortgage funding. In one case we are familiar with, a synagogue asked members to lend $300 per family (on a purely voluntary basis) for five years at zero interest. The synagogue was able top raise enough money to reduce the need for a conventional high interest mortgage by more than 60%.
But there was an unexpected sweetener.
At the end of five years, the synagogue wrote to the members to say that funds were available to repay the loans (interest rates haven taken a big dive) but suggested that if the loan were forgiven, a tax receipt could be issued. To the surprise of the Board, 78% of the lenders indicated that they would be delighted to get the tax receipt rather than the $300.
The use of a loan and subsequent forgiveness was the subject of a Tax Court decision. In the case of Benquesus the Tax Court validated a somewhat unusual fact situation. The Court’s summary of the facts were as follow:
“Jacques Benqueses, father of four of the Appellants, and father-in-law of one of the Appellants, lives in Israel. In 1997, he transferred significant funds to the Canada charity, Sephardic Educational Foundation, indicating in writing that the monies are loaned to the Foundation by his children. Further, if the children were to forgive the loan, the funds should be considered a donation. The children forgave some, but not all, of the monies. In 1999, the Foundation issued charitable receipts to the Appellants for such gifts. The Minister of National Revenue disallowed such amounts as charitable donations claimed by the Appellants in the 1999 taxation year. The Appellants appealed the assessments on the basis that Mr. Jacques Benqueses had gifted them the money, which they donated to the Foundation. This matter turns on whether Mr. Jacques Benqueses gifted the monies to his children. I find that he did.”
In this particular case, the structure of the arrangement allowed a non-resident to get money into the hands of a charity and have the benefit accrue to his children who were resident of Canada and thus could use the tax relief which he could not.
We should also note at least en passant that it is not unheard of for social and sporting clubs to require new members to make interest free loans in some form as part of a commitment to the organization.
Of course, with interest rates at almost historic lows, the traditional reason for looking to members for loans has been somewhat ameliorated. But we were struck by an article from the March 13 on line edition of the NPQ. which discusses a new loan fund set up in Arizona to benefit non-profits. And the rationale is one which can easily be understood by Canadian charities and non-profits.
“It can often take weeks or even months for nonprofits to receive payments for services that have been rendered under a contract with a government or other funding source. To help bridge that gap, a new loan fund has been created in Tucson, Arizona. Awards were announced for three non-profit organizations as the first recipients of loans from the newly established Nonprofit Loan Fund of Tucson and Southern Arizona: Wingspan, the YWCA, and the International School of Tucson.
The fund was established in 2012 as a supporting organization of the local community foundation in recognition that nonprofits often have a cash flow crunch as they await payments. To ensure that services can continue, the fund is offering a limited number of bridge loans to nonprofits that are considered to be effective and well managed but face a shortfall on a temporary basis.
The loan fund has certain eligibility requirements: The non-profit must be more than three years old with an annual operating budget of more than $250,000 and a verifiable source to repay the funds. The loans are offered on a rolling basis at “low interest rates” in amounts between $10,000 and $50,000 for up to 12 months. Ultimately, the goal is to help nonprofits that cannot secure traditional loans, working with them to build creditworthiness.”
We feel that while almost all organizations look to traditional fundraising as the main sources of income, it is incumbent on boards to give some thought to variants such as voluntary loans from members which can provide significant cash flow benefits and give the lenders the same kind of vested interest in the organization as have donors.