A. INTRODUCTION
CRA Guidance – CG–002 “Canadian Registered Charities
Carrying Activities Outside of Canada” (“The Guidance”) has been amended by replacing Appendix B entitled “What if a charity helps
build capital property in a foreign country?”, with a new Appendix B now entitled
“What if a charity wants to transfer capital property to a non-qualified donee
in a foreign country?” The Guidance was originally released on July 8, 2010.
The exact date that Appendix B was replaced by CRA is not known, but it would
appear that the amendment may have occurred on June 14, 2012, being the “date modified”
indicated in the online version of the Guidance accessed on June 27, 2013. To
our knowledge, no notice was given by CRA concerning this amendment, which is
surprising given the fact that the changes in the wording set out in Appendix B,
as explained below, are not of an insignificant nature.
B. COMPARISON OF CHANGES
In the original version of the Guidance, the key
provisions of Appendix B explained how a charity could build or help build
capital property in a foreign country and read as follows:
What
if a charity builds or helps build capital property in a foreign country?
A charity may want to buy or build, or
help buy or build, real or capital property in a foreign country, such as land
or buildings. However, the charity may find that owning real or capital
property is not practical or possible. For example, some countries do not
permit foreign ownership of real property, or it could be extremely difficult
to operate and maintain a building in another country.
In these cases, a charity may seek to
transfer ownership of real or capital property to a foreign non-qualified
donee. These types of transfers can be problematic because land and buildings
tend to have a relatively high value, and can also be used for a wide variety
of purposes. For example, a charity might help an impoverished community build
a bridge that allows people to cross a river and take their goods to a local
market more quickly. Then a powerful member of that community may seize control
of the bridge and start charging a toll for personal profit.
Transferring ownership of capital
property to a local organization or government body might be acceptable to the
CRA, as long as documentation with any non-qualified done states that the
property will be used only for charitable purposes. The charity should get
reasonable assurances, and document and retain these assurances, that the
property will, at least for its expected useful life, be used for the benefit
of the community as a whole.
The charity should also, to the best of
its ability, assess the risk that its property is likely to be used
inappropriately. If the risk of inappropriate use outweighs the benefit that is
likely to be provided, the charity should not start, or should stop, the
project.
*Accessed on
August 9, 2010 and archived by the authors.
The key provisions of the new Appendix B of the Guidance
(including a new name for Appendix B) now reads as follows, with substantive
changes to Appendix B (as determined in the opinion of the authors) being
underlined for ease of reference:
What if a charity wants to transfer
capital property to a non-qualified donee in a foreign country?
A charity may want to acquire land or
buildings in another country, but find that owning capital property in that
country is impossible. Or a charity might already own capital property in a
foreign country, but a change in circumstances makes continued ownership
impossible. In these cases, a charity may want to transfer ownership of the
capital property to a foreign organization that may be a non-qualified donee. As
a rule, transferring ownership of capital property to any non-qualified donee,
including a local organization or government body, is not permitted. This is
because land and buildings might be used for non-charitable purposes. However,
transfers to non-qualified donees might be acceptable in the following three
situations:
· the country in which the charity is operating
does not permit foreign ownership of capital property; or
· the capital property is transferred only as
part of a development project to relieve poverty by helping a community to
become self-sufficient; or
· the charity can show that it has made every
reasonable effort to gift the capital property to another qualified donee, and
has made every reasonable effort to sell the capital property for its fair
market value, but has not been successful.”
A development project is generally
one where turning over the property to a local organization is integral to
giving a deprived community the means to break free of the cycle of poverty and
disease. This may include, for example, projects such as schools and hospital
buildings.
In any of the three scenarios above,
a charity should make sure that the organization it is transferring the
property to has a mandate that is consistent with ensuring the continued
charitable use of the property. The charity should
get documentation from the non-qualified donee stating that the capital
property will be used only for charitable purposes. Also, the charity should
get, document, and keep reasonable assurances that the property will, for its
expected useful life, benefit the whole community.
The charity should also, to the best of
its ability, assess the risk that its capital property might be used
inappropriately. If the risk of inappropriate use is greater than the benefit
that may be provided, the charity should not transfer ownership of the property.
Before transferring ownership of any capital property, and particularly in the
case of the third scenario in the above list, we recommend contacting the
Charities Directorate to consider the available options. [emphasis added]
C. COMMENTARY
What is obvious from comparing the two versions of
Appendix B of the Guidance set out above is that CRA has now made it much more
challenging for a charity operating in a foreign jurisdiction to transfer
ownership of real property to a non-qualified donee. This is surprising because Appendix F of the Guidance, which sets out the basic
elements of a written agreement between the parties in this situation, still makes
reference to the less onerous requirements of the old version of Appendix B by
continuing to state the following:
· “If any of the charity's funds or property are
to be used in the acquisition, construction, or improvement of immovable
property, the title of the property will vest in the name of the charity. If
not, there will be:
o provision indicating how legal title to that
property shall be held (in the name of a local charity, government agency,
municipality, or non-profit organization established to provide benefits to the
community at large);
o provision for the intermediary to get reasonable
assurances from the property holder, owner, or landlord, as the case may be,
that the property will continue to be used for charitable purposes for the
benefit of the public;”
The unchanged wording in Appendix F of the Guidance (i.e. reflecting
the previous wording of Appendix B) will presumably now need to be read subject
to the more onerous requirements that are in the current version of Appendix B.
It is not clear why CRA has felt that the more enhanced requirements relating to
the ownership of capital property by a non-qualified donee in a foreign
jurisdiction was either necessary or justifiable, as evidence of “direction and
control” when working through a third party intermediary. However, what is
clear is that these changes in the new Appendix B to the Guidance represents a much
more significant set of threshold requirements for charities that may be
contemplating transferring capital property to non-qualified donees in a
foreign country. As a result, charities will clearly want and need to consult
with their legal counsel before embarking on any capital property acquisitions in
this context. As well, in relation to those charities that have acquired
capital property in the past through non-qualified donees but may not meet the
more onerous threshold requirements set out in the new Appendix B of the
Guidance, it is hoped that CRA will exercise its administrative discretion and not
retroactively apply the new requirements in the revised Appendix B of the Guidance
to these charities.