When a Private Foundation Lends to Its Own Directors: Related-Party Transactions and Why the CRA Is Paying Attention

The letter never shows up at a convenient time.

It's on the Charities Directorate letterhead. It's polite. And by the second or third paragraph, there it is: a request for documentation on amounts receivable from, and investments in, non-arm's-length persons.

Everyone in the room already knows what that means. It means the loan.

We've walked several large private foundations through CRA audits recently, start to finish. In almost every one, the auditor's questions ended up in the same place: money that went out the door to a company run by the people sitting on the foundation's board.

What the CRA Is Actually Looking For

Auditors aren't checking whether your foundation made money on the loan. They're checking how the decision got made.

Sometimes the loan was booked as an "investment." Sometimes as a "bridge loan." In one file we saw, it was just a line on the balance sheet nobody had questioned in ten years.

The directors we talk to aren't evasive, and they're rarely embarrassed. They'll tell you, reasonably, that the money was never at arm's length risk. That the business was solid. That interest got paid. Often, all of that is true.

Then the questions start, and none of them are about the return:

• Who negotiated the terms on the foundation's side?
• Was the foundation separately advised, by someone not also advising the borrower?
• Was there security or a fixed repayment date?
• How was the rate set, and where's the valuation?
• Where are the board minutes, and who stepped out of the room?
• Did anyone put "don't make the loan" on the table as an option?

That's usually where a file falls apart. Not on the numbers. On the process.

The 1987 Case That Still Sets the Tone

This case is almost 40 years old, but it's the one every director-loan file still gets measured against.

Most foundation directors have never heard of Re David Feldman Charitable Foundation (1987), 58 O.R. (2d) 626, 26 E.T.R. 88 (Surr. Ct.). It's worth knowing.

Mr. Feldman had a strong year in 1984. To reduce his tax bill, he set up a private foundation and put $180,000 into it. The board was Mr. Feldman, his lawyer, and his accountant.

Almost right away, the board approved an unsecured loan of $175,000 to Mr. Feldman's own private company. The foundation got a promissory note. It never got any security. Nobody arranged independent legal advice for the foundation itself.

Here's the part people miss: the loan performed. It never defaulted. The foundation didn't lose a dollar.

The issue only came up because the foundation had to pass its accounts under the Charities Accounting Act, which put the loan in front of the Public Guardian and Trustee.

The court found the directors breached their fiduciary duties anyway.

• Mr. Feldman sat on both sides of the deal.
• His accountant worked for the borrower.
• The foundation had no independent voice at the table.

Because there was no proven loss, the court didn't order repayment. But it refused to pass the accounts, and it refused to award the directors their costs.

No loss. No default. Still a breach. That's the lesson, and it hasn't aged a day.

Ontario Has Tightened the Rules, Not Loosened Them

If anything, Ontario has made this harder to get right since 1987, not easier.

Under section 41 of the Not-for-Profit Corporations Act, 2010 (ONCA), a director with a material interest in a contract has to disclose it. We've written before about the broader scope of directors' and officers' obligations under ONCA, and conflict of interest sits at the centre of that duty.

For charitable corporations, disclosure isn't enough on its own. Ontario's guidance on the Not-for-Profit Corporations Act is direct: directors of a public benefit charitable corporation can't be in a conflict of interest at all, full stop. Stepping out of the room and abstaining doesn't cure it. Most related-party transactions need a court order, or a consent order from the Public Guardian and Trustee under section 13 of the Charities Accounting Act. This is closely tied to the broader question of director and officer liability — a board that gets this wrong isn't just risking the transaction, it's risking personal exposure.

There is one narrow exception. Since April 2018, O. Reg. 4/01 (as amended by O. Reg. 112/18) lets an Ontario charity pay a director, or someone connected to a director, without going to court — but only if every condition on the list is met:

• The interested person can't attend, participate in, or vote on the decision.
• The remaining directors must unanimously agree in writing on the maximum amount.
• The board must have considered the PGT's published guidance.
• No more than 20% of directors (or people connected to them) can be paid this way in one fiscal year.
• The payment must appear in the financial statements and get reported at the annual meeting.

Some things stay off-limits even under this exemption: payment for serving as a director or employee, fundraising services, and real estate transactions.

This regulation is a narrow door. It's not a general permission slip.

What the Income Tax Act Adds on Top

Ontario law covers the fiduciary side. Federal tax law covers the money — and for private foundations, it has more teeth than most boards expect.

The table below breaks down the four main federal rules that apply to director-related transactions:

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A few of these are worth unpacking.

Non-qualified investments cover more than cash loans. Unlisted shares in a director's company, and even the right to acquire those shares, count too. The annual reporting form is the T2140, and CRA's guidance is CG-006.

The prescribed-rate assumption trips up a lot of boards. Some assume that charging CRA's prescribed interest rate automatically makes a loan safe. It doesn't. CRA's own technical interpretation confirms that sections 189 and 188.1 are assessed independently. A borrower avoiding tax under section 189 doesn't stop the foundation from getting hit with an undue benefit penalty on the same loan.

Revocation is the backstop. We've covered what happens when a charity doesn't meet its obligations in general terms before, and related-party dealing is one of the more serious paths there. The Federal Court of Appeal has revoked charitable registration over exactly this kind of dealing before. See Prescient Foundation v. M.N.R., 2013 FCA 120 (leave to appeal to the SCC refused), and, on the records side specifically, Opportunities for the Disabled Foundation v. M.N.R., 2016 FCA 94 and Ark Angel Foundation v. M.N.R., 2019 FCA 21.

A Recent, Real Example

This isn't just old case law. It's happening right now, to real foundations.

CRA's redacted audit letter to the Engelking Foundation (March 10, 2023) reads like Feldman with modern numbers.

Here's what happened, step by step:

1. A director joined the board.
2. That same day, the foundation bought 10,000 private shares for $225,000.
3. Those same shares went straight back to the director, same day, for a promissory note.
4. About eight months later, the foundation bought the shares back at $35 each.
5. This left the foundation owing the director roughly $121,930. No cash ever changed hands.

There were no board minutes for a transaction that used up nearly all of the foundation's assets. There was no independent valuation, even though the same shares had traded at $6 just weeks earlier.

CRA treated $6 as fair market value and calculated the penalty:

10,000 shares × ($35 − $6) × 105% = $304,500

On top of that: a 5% receipting penalty, a one-year suspension, and findings of breached fiduciary duty and inadequate books and records.

CRA ultimately proposed revocation instead of penalties.

What stands out isn't that the foundation held private shares. It's what was missing: no valuation, no minutes, no independent judgment, and no clear charitable purpose being served.

Why Private Foundations Get Flagged in the First Place

You might assume CRA finds these transactions through a tip or a complaint. Usually, it's simpler than that: your own annual filing flags it.

The T3010 return practically asks for it. Private foundations must report:

• Amounts receivable from non-arm's-length parties
• Investments in non-arm's-length persons (line 4130)
• Amounts owing to non-arm's-length parties (line 4320)

Schedule 1 also asks directly whether the foundation held shares, rights, or debts that meet the non-qualified investment definition, and whether it owns more than 2% of any class of shares in a corporation. That last one triggers Form T2081, the excess corporate holdings worksheet.

A number in one of these boxes isn't proof of wrongdoing. But based on the files we've seen, it's increasingly the flag that starts an audit. If your foundation has a director-related loan on the balance sheet, assume CRA can already see it.

What We Tell Boards

If your foundation has anything resembling a director loan, here's where to start.

• Assume the transaction is prohibited until cleared. In Ontario, that means the O. Reg. 4/01 conditions, or a court or section 13 order — not just a recorded abstention.
• Get the foundation its own advisor. Feldman turned partly on the fact that only the founder's own advisors were in the room.
• Value it independently, in writing, before closing. A valuation done after an audit letter arrives carries almost no weight.
• Paper it like a commercial lender would. Security, a fixed repayment date, a market rate, covenants — whatever an arm's-length lender would have required.
• Keep the minutes. Who attended, who stepped out, what was discussed, and why the deal serves the foundation. Missing minutes were an independent ground for revocation in Engelking.
• Check the T3010 before filing. Confirm the non-arm's-length lines and Schedule 1 answers match reality, and that the T2140 and T2081 are filed where required. Our guide to avoiding common T3010 filing mistakes covers this in more depth.
• Fix legacy transactions now, on your own terms. Old founder loans and unpapered family-company shares are exactly what audits are surfacing. A voluntary correction is a far better story than an explanation after the fact.

The Bottom Line

The rule from 1987 hasn't moved: the prohibition is on the conflict, not on the loss.

A foundation can be repaid in full, on time, with interest — and its directors can still have breached their duties. Today's penalty provisions don't even require a loss to apply.

If your foundation has an existing related-party transaction, the best time to review it was before the loan closed. The second-best time is now, before your next filing or audit letter arrives.

This article is general information, not legal advice. If your foundation has an existing transaction with a director, founder, or related company, get advice specific to your facts before your next filing or audit.

Sources and further reading

• Re David Feldman Charitable Foundation (1987), 58 O.R. (2d) 626, 26 E.T.R. 88 (Surr. Ct.)
• Not-for-Profit Corporations Act, 2010, S.O. 2010, c. 15, s. 41: https://www.ontario.ca/laws/statute/10n15
• Ontario, Guide to the Not-for-Profit Corporations Act, 2010: https://www.ontario.ca/page/guide-not-profit-corporations-act-2010
• Charities Accounting Act, R.S.O. 1990, c. C.10, s. 13; O. Reg. 4/01, as amended by O. Reg. 112/18
• Office of the Public Guardian and Trustee, Payments to Directors and Connected Persons (2018): https://www.publications.gov.on.ca/store/20170501121/Free_Download_Files/300777.pdf
• Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), ss. 149.1(1), 168(1), 188.1(4)–(5), 188.2, 189, 230(2)
• CRA Guidance CG-006, Non-qualified investment – Tax liability: https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/policies-guidance/non-qualified-investment-tax-liability.html
• CRA Summary Policy CSP-U02, Undue benefits: https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/policies-guidance/summary-policy-u02-undue-benefits.html
• CRA Technical Interpretation 2017-0683831I7, Prescribed Rates and Undue Benefits (December 5, 2019)
• CRA audit letter, Engelking Foundation (March 10, 2023): https://www.canadiancharitylaw.ca/wp-content/uploads/2025/04/Engelking-Foundation-Redacted.pdf
• Prescient Foundation v. M.N.R., 2013 FCA 120
• Opportunities for the Disabled Foundation v. M.N.R., 2016 FCA 94
• Ark Angel Foundation v. M.N.R., 2019 FCA 21
• Income Tax Folio S1-F5-C1, Related Persons and Dealing at Arm's Length

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