A. INTRODUCTION
Terrance S.
Carter
The 2011 federal Budget introduced on March 22, 2011 (the
“Budget”) proposes sweeping changes to the regulatory regime affecting registered
charities and qualified donees, and in particular Canadian Registered Amateur Athletic
Associations (RCAAAs), as summarised below in this Charity Law Bulletin.
The stated purpose of the Budget proposals concerning the regulation of
registered charities and other qualified donees is to equip Canada Revenue
Agency (“CRA”) as the administrator of the tax system related to the charitable
sector with “an effective set of compliance tools to safeguard the donation of
Canadian taxpayers and act against any organization that does not follow the
rules.” In doing so, the government has targeted areas of perceived weakness in
the regulation of charities and qualified donees, with a specific focus on
RCAAAs, that the government believes requires either more transparency or more
equality in treatment, as well as a focus on closing potential tax loop holes,
such as the current “double-dipping” involving gifts of flow through shares.
Because of the recent dissolution of Parliament, it will
be important to carefully monitor its impact on the proposed provisions
detailed in the Budget. Since most of the proposals reflect technical
amendments to the Income Tax Act (“ITA”) that the Budget states are
needed to better regulate the charitable sector (and which likely originated
from within CRA or the Department of Finance), there is a good chance that
most, if not all of the proposals, will reappear in a future federal budget or
as part of a separate bill containing technical amendments to the ITA. It
remains unclear, however, whether CRA will administratively treat the Budget proposals
as already being in effect notwithstanding the subsequent dissolution of
parliament and if so from what date. Some of the proposals, like those dealing
with flow through shares, have a stated effective date of the Budget date,
whereas other proposals, such as those dealing with new governance
requirements, have an effective date of the later of January 1, 2012 or the
date of Royal Assent of the enacting legislation. As such, there remains uncertainty
concerning when the Budget provisions will take effect, if at all. However, in
the meantime, there should be opportunities for the charitable sector to enter
into a dialogue with CRA and the Department of Finance concerning the terms and
the implementation of the Budget proposals, including some of the unintended
consequences that will no doubt come to light over the next few months after
the charitable sector has had an opportunity to thoroughly consider the Budget proposals.
What follows in this Charity Law Bulletin are a
series of brief overviews of the various proposals contained in the Budget in
the order that they appear within Annex 3 of The Budget Plan.
B. NEW REGULATORY REGIME FOR QUALIFIED DONEES
Theresa L.M. Man
Qualified donees may issue official donation
receipts for gifts. “Qualified donees” is a termed defined in the ITA to include
various types of entities, the largest group of which are registered charities. To safeguard the tax system from abuse
and to ensure compliance by those organizations given the privilege of issuing official
donation receipts, the Budget proposes to extend to the following types of qualified
donees certain regulatory requirements that currently apply to registered charities
in the interest of fairness and consistency:
· registered Canadian amateur athletic
associations (RCAAAs);
· municipalities in Canada;
· municipal and public bodies performing
a function of government in Canada (these entities are proposed to be added to the
list of qualified donees and were previously included in the proposed technical
amendments to the ITA released on July 16, 2010;
· housing corporations in Canada constituted
exclusively to provide low-cost housing for the aged;
· prescribed universities outside
of Canada, the student body of which ordinarily includes students from Canada; and
· certain other charitable organizations
outside of Canada that have received a gift from Her Majesty in right of Canada.
These new requirements will
be effective on or after the later of January 1, 2012 and the date of Royal Assent
to the enacting legislation. The extension of these new requirements will not apply
to the balance of qualified donees, i.e., the Government of Canada, provincial and
territorial governments in Canada, and the United Nations and its agencies. Registered
national arts service organizations are deemed to be “registered charities” and
are therefore currently subject to the same requirements that apply to registered
charities.
The proposed new requirements
to apply to the above list of qualified donees are:
(1) Qualified donees will
be identified in a publicly available list maintained by CRA. This will enable the
public to determine which organizations may issue an official donation receipts
and registered charities to determine whether an organization is a qualified donee
for grant-making purposes. Technical amendments to the ITA released on July 16,
2010 already proposed to authorize CRA to release the name, registration number
and other relevant information with respect to RCAAAs. As well, a list of
prescribed universities is already published in Schedule VIII of the Income
Tax Regulations and CRA already publishes a list of charitable organizations
outside of Canada that have received a gift from Her Majesty in right of Canada.
(2) If a qualified donee
does not issue donation receipts in accordance with the ITA and its regulations,
it may be subject to suspension of receipting privileges or revocation of
qualified donee status.
(3) Monetary penalties associated
with improper issuance of receipts that currently apply to registered charities
will be extended to RCAAAs.
(4) Qualified donees will
be required to maintain proper books and records and provide access to those books
and records to CRA when requested. If a qualified donee fails to do so, CRA may
suspend its receipting privileges or revoke its qualified donee status.
(5) Monetary penalties associated
with failing to file an information return that apply to registered charities will
be extended to RCAAAs.
As well, the Budget proposes
to extend the following additional regulatory requirements (which currently apply
to registered charities) to RCAAAs:
(1) Exclusivity of Purpose
and Function - The Budget proposes that RCAAAs be required to have the promotion
of amateur athletics in Canada on a nation-wide basis as their exclusive purpose and exclusive function, rather than their primary purpose and primary function.
These changes are not intended to prevent RCAAAs from staging or engaging in international
events and competitions. RCAAAs will also be permitted to carry on related business
activities, such as selling merchandise related to their sport, and to engage in
limited non-partisan political activities. Breach of these requirements will result
in the RCAAA possibly being subject to monetary penalties, suspension of receipting
privileges, or revocation.
(2) Undue Benefits - The
Budget proposes that if an RCAAA provides an undue benefit to any person (e.g. excessive
compensation to staff, professional fundraiser or any individual or company with
whom it does business), it may be subject to monetary penalties, suspension of its
receipting privileges, or revocation.
(3) Public Access to
Information - The Budget proposes to authorize CRA to make available to the public
certain information and documents in respect of RCAAAs, in the same manner as applies
to registered charities, e.g. governing documents, annual information returns, applications
for registration and the names of directors.
C. NEW GOVERNANCE REGIME FOR REGISTERED CHARITIES AND RCAAAS
Terrance S.
Carter
The Budget identifies a CRA
concern that there is a recurring problem with applications for charitable
status being submitted by individuals who have been involved with other
charities and RCAAAs that have had their status revoked for serious
non-compliance, such as issuing fraudulent receipts, or have a criminal record
of offences involving a breach of public trust, such as fraud or
misappropriation. Currently, CRA does not have the ability to refuse to
register or revoke the status of a registered charity or RCAAA based upon any
of these grounds.
As a result, the Budget proposes
to give CRA unprecedented new authority over the governance of registered
charities and RCAAAs. In this regard, the Budget gives CRA the discretion to
refuse or to revoke the registration of a charity or a RCAAA or to suspend its
authority to issue official donation receipts, if a member of the board of
directors, a trustee, officer or equivalent official, or any individual who
otherwise controls or manages the operation of the charity or RCAAA:
· has been found guilty of a criminal offence in Canada or an
offence outside of Canada that, if committed in Canada, would constitute a
criminal offence under Canadian law, relating to financial dishonesty
(including tax evasion, theft or fraud), or any other criminal offence that is
relevant to the operation of the organization, for which he or she has not
received a pardon (“relevant criminal offence”);
· has been found guilty of an offence in Canada within the past
five years, or an offence committed outside Canada within the past five years
that, if committed in Canada, would constitute an offence under Canadian law,
relating to financial dishonesty (including offences under charitable
fundraising legislation, convictions for misrepresentation under consumer
protection legislation or convictions under securities legislation) or any
other offence that is relevant to the operation of the charity or RCAAA
(“relevant offence”);
· was a member of the board of directors, a trustee, officer or
equivalent official, or an individual who otherwise controlled or managed the
operation of a charity or RCAAA during a period in which the organization
engaged in serious non-compliance for which its registration has been revoked
within the past five years; or
· was at any time a promoter (as defined by section 237.1 of the
ITA) of a gifting arrangement or other tax shelter in which a charity or RCAAA
participated and the registration the charity or RCAAA has been revoked within
the past five years for reasons that included or were related to its
participation.
All of these individuals are
collectively defined in the Budget as “ineligible individuals.” These measures will apply on or after the later of January 1, 2012, or Royal Assent to the enacting legislation.
The Budget states
that CRA will look at the “particular circumstances” of a charity or RCAAA in
determining whether CRA’s new authority to refuse or revoke registration as a
charity or RCAAA, or suspend the ability to issue official donation receipts will
apply, but does not state what those circumstances are except to say that if
there is involvement of an “ineligible individual” with an organization, CRA
will take into account whether “appropriate safeguards have been instituted to
address any potential concerns.” However, there is no explanation of what these
safeguards might be.
The practical question that
arises is what sort of due diligence will a charity or a RCAAA be required to undertake
to ensure that an “ineligible individual” does not become involved or continue to
be involved as a board member, trustee, officer or equivalent official, or one
who controls or manages the organization. Even though the Budget indicates that
a charity or RCAAA will not be required to conduct background checks, a charity
will likely want a prospective board member or officer to complete some type of
questionnaire to demonstrate due diligence. However, is the questionnaire to be
done on a yearly or just when the person joins the organization? As well, how
extensive does the questionnaire need to be, in particular given the breadth of
the definition of “relevant offences” referred to in the Budget, since such
offences will extend well beyond criminal code provisions to include, for
instance, violation of provincial fundraising and securities legislation within
the last five years, as well as similar legislation outside of Canada? These
are all unanswered questions which will need to be addressed in discussions between
CRA and the charitable sector leading up to the implementation of the
provisions of the Budget, whenever that is.
D. RECOVERY OF TAX ASSISTANCE FOR RETURNED GIFTS
Ryan M.
Prendergast
The Budget provides clarification with respect to what
happens when a charity returns a donation as it relates to compliance with the ITA.
In this regard, the following synopsis of the Budget provisions relating to the
return of a gift under the ITA do not address the other potential liabilities that
a charity could still face at common law were it to return a gift.
Prior to the Budget, only brief guidance was provided by
CRA with respect to the situation of a return of a gift to a taxpayer. While
CRA has a page on its website titled “Returning a Gift to a Donor,” the page generally recommends that legal counsel be contacted by the charity
should the situation arise. However, measures proposed in the Budget will now
clarify the tax consequences where a gift is returned to a donor and expands
CRA’s ability to reassess those donors. The Budget indicates that these
measures will apply in respect of gifts or property returned on or after the date
of the Budget.
The Budget permits CRA to reassess a taxpayer outside the
normal reassessment period and disallow a taxpayer’s claim for a credit or
deduction in any situation where the gifted property is returned to a donor in
order to ensure “that tax assistance is not improperly retained.” In this
regard, the Minister of National Revenue will have the authority to reassess a tax
return of any person where the reassessment can reasonably be regarded as
relating to a return of property from a qualified donee to the donor. In
addition, where a qualified donee issued an official donation receipt in
respect of a gift of property and subsequently returns that property to the
donor, if the value of that returned property is greater than $50, the
qualified donee must issue a revised donation receipt with prescribed
information and file a copy with CRA.
With respect to the return of donated property, the Budget
provides rules which address various scenarios that could occur on the return
of a gift, which can be summarized as follows:
1. If the transfer of
the original property was a gift, the person is deemed not to have made a gift
of the original property nor to have disposed of the property at the time the
gift was made. This provision cancels the gift from having occurred at the
time the original property was given, thereby disentitling the donor from
having received a tax receipt for income tax purposes in the first place.
2. If the transfer
of the original property was not a gift, for greater certainty, the person is
considered not to have disposed of the original property at the time that it
was provided to the qualified donee. While this provision would seem somewhat obvious,
it appears to capture transfers of property which were not gifts to begin with
and may have been receipted improperly. Therefore, the Minister would then be
able to reassess the donor if the charity returned the property.
3. If the returned
property is identical to the original property, the returned property is deemed
to be the original property. While a qualified donee which receives
original property which was transferred to it as an in-kind gift can likely
return the same original property to the donor, it is unlikely that a charity
can return the same funds it might receive as a cash gift to the donor. In this
regard, this provision will deem the return of “identical” property, which
could mean the same sum of money that was given, as the same property which the
qualified donee originally received from the donor.
4. If the returned property is not the same property or identical
property, the person is deemed to have disposed of the original property at the
time that the person acquires the returned property. This provision would seem to mean that where the property
that is returned to the donor is not the same or identical property, the donor
will incur a deemed disposition on the original property that was given upon
receipt of the returned property. This may occur where the qualified donee
returns funds which are in lieu of an in-kind gift which the donor originally
gifted to the qualified donee.
A qualified donee faced with the return of a gift will
therefore want to give consideration to the above rules depending on the
situation and the property donated, as it may result in a different outcome for
the donor depending upon the nature of the original gift and what property is
being returned to the donor.
E. GIFTS OF NON-QUALIFYING SECURITIES
Karen J.
Cooper
The Budget proposes that the rules regarding donations by
a taxpayer of a non-qualifying security (“NQS”) to a registered charity be
modified, effective for dispositions made by recipient organizations on or
after the date of the Budget. A NQS is defined to include a share, a debt obligation
or other security issued by a taxpayer or by a person not dealing at arm’s
length with a taxpayer, but does not include publicly listed securities and
deposit obligations of financial institutions. These rules previously applied
only to donations of NQS to private foundations and other registered charities
not at arm’s length to the donor and have been extended by the Budget to apply
to all gifts of NQS to all registered charities. Also, the tax recognition will
now be deferred until the recipient charity disposes of the NQS for
consideration that is not another NQS of any person. If the NQS is not disposed
of by the charity within the five-year period following the date of the gift,
there will be no tax recognition of the gift.
The Budget has also proposed new anti-avoidance rules to
catch situations whereby, through a series of transactions, a donor avoids the
application of the above NQS rules, but at the end of the series of
transactions the charity receives a NQS.
F. GRANTING OF OPTIONS TO QUALIFIED DONEES
Karen J. Cooper
Effective for gifts made on or after
March 22, 2010, the Budget proposes to delay the recognition of a gift to a
qualified donee of an option to acquire property. Previously, where a donor
granted an option to purchase property to a qualified donee, the gift was
recognized on the date of the gift for the fair market value of the option and
a receipt could be issued immediately. The Budget proposes to delay this until
the option is exercised by the qualified donee, eg. the property is purchased. The
new rules are designed to coincide with the proposed split-receipting rules, in
particular the proposed rule providing that where an advantage associated with
a gift exceeds 80 per cent of the value of the property transferred, there is
no gift. As such, where the total of any consideration paid for either the option or the property by the qualified donee exceeds 80 per cent of the fair market value of the underlying property, the exercise of the option will not be
considered to be a gift unless the donor can establish that the granting of the
option and the exercise thereof was made with the intention of making a gift to
a qualified donee. The proposed provisions also deal with the value of the gift
for receipting purposes when the option is exercised, and when the option is
disposed of by the qualified donee prior to being exercised, the proceeds of
disposition to the donor and the value of the gift for receipting purposes.
G. DONATIONS OF FLOW-THRU SHARES
Karen J.
Cooper
Since the elimination by the 2006 Budget
of the tax on capital gains accruing on donations of publicly-traded securities
to registered charities, donation tax shelter structures involving gifts of
flow-thru shares (“FTS”) have increased substantially. Generally, a taxpayer can
acquire FTS issued by corporations in the oil and gas, mining and renewable
energy fields and claim the benefit of “flow-thru” income tax deductions of certain
expenses. As these deductions are claimed, the adjusted cost base (“ACB”) of
the shares is reduced (usually to nil) such that when the FTS are sold, the
full amount of the sale proceeds are taxed as a capital gain. If, instead, the FTS
are donated to charity, the taxpayer gets the benefit of a tax credit or
deduction based on the value of the share at the time of the donation and can also
claim the benefit of the exemption from capital gains tax on the disposition. In
many circumstances, the combined effect of the deduction of the “flow-thru”
expenses, the elimination of the capital gains tax, and the charitable donation
deduction or credit substantially reduces or virtually eliminates the after-tax
cost of making a charitable donation.
The 2011 Budget proposes to limit the
availability of the exemption from tax on capital gains where FTS are donated to
a qualified donee. Effective on or after the Budget date, the exemption from
tax on the capital gain that arises from the donation of FTS will only apply to
the extent that the cumulative capital gains in respect of the gift exceeds the
original cost of the FTS. This will have the effect of substantially reducing the
tax benefits of a gift of FTS so that they are generally no more attractive an
option than any other gift of shares or cash. The Budget also contains
anti-avoidance provisions that are intended to ensure taxpayers are not able to
structure around these changes.
H. SUPPORTING SOCIAL PARTNERSHIPS
Theresa L.M.
Man
The Budget recognizes that some groups, such as the
homeless, persistently unemployed, and at-risk youth, face complex and
continual social challenges and that often the best solutions to tackling these
difficult problems are found locally. Citizens, businesses, charities and other
groups, such as the Canadian Task Force on Social Finance, are working together
to develop ways to address local challenges. The Budget states that the Government
will encourage the development of government/community partnerships enabling
communities to tackle local challenges and testing new approaches to improve
performance. Details are to be announced by the Minister of Human Resources and
Skills Development at a later time.