A. INTRODUCTION
Finance Minister Jim Flaherty introduced
on February 11, 2014, the 2014 Federal Budget (“Budget
2014”). While billed by some commentators as a “non event”, Budget 2014 included a number of surprises for the charitable and not-for-profit sector. Based
upon statements made by the Minister of Finance in December 2013, there was an
expectation by some that Budget 2014 might restrict the ability of charities to
become involved in political activities, building upon the restrictions that had been introduced in the 2012
Federal Budget. As a consequence, few federal budgets have been anticipated with more
trepidation by the charitable sector. However, no such restrictions were
included in Budget 2104, although it introduced an amendment to the Income Tax Act (“ITA”) that restricts the
ability of charities and registered Canadian amateur athletic associations
from accepting donations from a foreign state listed
as a supporter of terrorism for purposes of the State
Immunity Act, or from an agency of such a state.
On the flip side, there was little
expectation that there would be any new tax incentives for charitable donations
this year, but to the surprise
of many Budget 2014 did contain a few welcome tax incentives, including encouraging Canadians to make additional donations of ecologically
sensitive land by doubling the 5-year carry-forward period to ten years, as
well as facilitating charitable
giving by allowing increased flexibility to apply charitable donation credits
against the income tax liabilities of the individual or the estate.
This Charity
Law Bulletin provides a brief summary of these and
some of the other more significant provisions from Budget 2014 that affect
charities.
B. SUMMARY
1. Donations of Ecologically Sensitive Land
Currently, the Income Tax Act
provides enhanced tax incentives (similar to those available in respect of
publicly-traded securities), beyond those available in respect of ordinary
charitable gifts, for gifts of full and partial interests in ecologically
sensitive land made to eligible conservation charities, including land trusts,
through the Ecological Gifts Program (EGP) administered by Environment Canada. However,
the availability of the tax credit or deduction related to ecological gifts is
currently limited to a 5 year carry-forward, which often results in some of the
tax benefit arising from an ecological gift being unused. This is particularly
the case for lands under significant development pressure (for example, coastal
or waterfront properties, and lands in close proximity to growing urban areas)
where land values have appreciated significantly. Such lands have often been
held by the same owner for decades – frequently farmers or others on limited or
fixed incomes – who do not have the income to offset the tax receipt over the 5
year period.
Following a request by the Canadian Land
Trust Alliance in its pre-budget submissions for 2012, the Notice of Ways and
Means Motion filed in support of Budget 2014 proposes to amend subparagraph
110.1(1)(d)(iii) and paragraph (c) of the definition of “total ecological
gifts” in subsection 118.1(1) to allow the charitable deduction or credit resulting
from an ecological gift to be carried forward for ten (10) years, instead of the
current five (5) years. This amendment will apply to donations made on or after
February 11, 2014.
2. Estate Donations
Another of the welcome proposed changes in Budget 2014 in
order to provide tax incentives for charitable giving is to provide more
flexibility to donations made by will for income tax purposes.
Currently under subsection 118.1(5) of the ITA, a gift made
by an individual’s will is deemed to have been made by the individual
immediately before he/she died. Subsection 118.1(4) of the ITA provides
that a gift made in the year of death is deemed to have been made in the year immediately
prior to death to the extent that the tax credit for the gift has not been claimed
in the year of death. This would allow the donation tax credit to be claimed in
the individual’s terminal tax return or in the year immediately prior to death.
Similar provisions apply where an individual designates, under a Registered
Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF),
Tax-Free Savings Account (TFSA) or life insurance policy, a qualified donee as
the recipient upon the individual’s death of the proceeds of the plan or
policy. On the other hand, tax credit for a gift made by the estate of a
deceased person can only be claimed by the estate.
For deaths that occur on or after January 1, 2016,
Budget 2014 proposes that donations made by will and designation donations will
be deemed to have been made by the estate, at the time at which the
property that is the subject of the donation is transferred to a qualified
donee. As such, these donations will no longer be deemed to have been made by
the testator immediately before death. To provide additional flexibility of the
tax treatment of these gifts, the trustee of the estate will be able to
allocate the donation made by will among any of the following: (a) the taxation
year of the estate in which the donation is made; (b) an earlier taxation year
of the estate; or (c) the last two taxation years of the deceased person.
A qualifying donation will be a donation effected by a
transfer within the first 36 months after the individual’s death of property to
a qualified donee. In the case of a transfer from an RRSP, RRIF, TFSA or
insurer, the existing rules for determining eligible property for designation
donations will apply. In any other case, the donated property will be
required to have been acquired by the estate on and as a consequence of the
death (or to have been substituted for such property).
Subparagraphs 38(a.1)(ii) and (a.2)(ii) and 39(1)(a)(i.1)
and section 118.1 of the ITA will be amended to effect these changes.
An estate will continue to be able to claim a donation
tax credit in respect of other donations in the year in which the donation is
made or in any of the five following years.
The current limits that apply in determining the total
donations that are creditable in a year will continue to apply. In this regard,
generally, the maximum amount of donations that may be claimed in a year is 75%
of net income. Subsection 118.1(1) provides that the 75% limit does not apply
in the year of the donor’s death and the immediately preceding year. Therefore,
donations made in the year of the donor’s death and the immediately preceding
year could be deducted up to 100% of the deceased’s income in those years.
However, a gift made by an estate may only be entitled to a charitable donation
credit pursuant to subsection 118.1(3) up to 75% of the income of the estate.
Because of the additional tax benefits of gifts made by will
that is currently available under subsection 118.1(5), determining whether a
gift qualifies as a gift made by will has been a key consideration in estate
planning in order to obtain the desired tax results. However, such a
determination is a complex area because there is little case law dealing with
what would constitute a gift made by will pursuant to subsection 118.1(5). The
interpretation of this subsection has been, in the most part, in accordance
with the positions taken by the CRA in its various interpretation bulletins,
technical interpretations and rulings.
Since technical amendments to the ITA were not included
in Budget 2014, it is not clear at this point whether the proposed changes mean
that it will no longer be necessary to determine whether a gift is made by
will. If such a determination is still necessary because the new benefits are
only available to “gifts made by will”, as opposed to gifts made by estates, it
will become even more important for estate planners and solicitors to take care
in structuring donations in wills to ensure desired tax result is achieved. It
is hoped that the technical amendments to the ITA will provide clarity on this
issue and hopefully provide a mechanism whereby it will no longer be necessary
for estate planners and solicitors to navigate through the maze of the CRA in
its various interpretation bulletins, technical interpretations and rulings in
making such a determination.
3. Donations of Certified Cultural Property
A certified cultural property is a
property of outstanding significance and national importance to Canada, for
which a certificate has been issued by the Canadian Cultural Property Export
Review Board. Like ecological gifts, the ITA provides favourable income tax
treatment for the disposition of certified cultural property to institutions
and public authorities designated by the Minister of Canadian Heritage. This
favourable treatment includes a tax exemption for capital gains realized on the
disposition of cultural properties to those designated institutions and, when
disposition is by way of a gift to those institutions, the provision of a tax
credit or a deduction to donors, up to 100% of their net income.
As part of the enactment of outstanding
technical amendments to the ITA last summer, new subsection 248(35) of the ITA
introduced a new deeming provision to require the fair market value of the
property that is the subject of a gift, for purposes of determining the eligible
amount of the gift under the new split-receipting rules, to be deemed to be the
lesser of (i) the “fair market value of the property otherwise determined,” and
(ii) the cost (or the adjusted cost base in the case of capital property) of
the property to the donor immediately before the gift is made. Certain exceptions to
this rule are listed in subsection 248(37) and currently includes in paragraph
(c) gifts of cultural property. At the time of the initial introduction of
these amendments, the exception for cultural property was included with other
similar exceptions on the basis that the fair market value of the gift was
independently determined and would, therefore, not be subject to a high degree
of abuse.
Continuing on the theme from last year’s
Budget 2013 of taking proactive measures to curtail the use of tax shelters,
Budget 2014 notes that donations of cultural property could be the target for
abuse by tax shelters “because of the combination of its favourable tax
treatment, inherent uncertainties in appraising the value of art and artefacts,
and the exemption from the rule that deems the value of a gift to be no greater
than its cost to the donor in certain circumstances.” As a result, the Notice
of Ways and Means Motion filed in support of the Budget proposes to amend paragraph
248(37)(c) to limit the availability of the exception for gifts of cultural
property to those gifts that have not been made as part of a gifting
arrangement that is a tax shelter (as those terms are defined in the ITA). This
provision will apply to donations made on or after February 11, 2014.
4. New De-Registration Power – State Support of
Terrorism
It has been announced that section 149.1 of the ITA will
be amended to enable the Minister of National Revenue to refuse to register a
charity or revoke its registration if a charity or registered Canadian amateur
athletic association (“RCAAA”) is determined to have accepted a “gift” from a “foreign
state” listed in the State Immunity Act. At the present time only Syria
and Iran are listed under the State Immunity Act, but this could change
at any time with updated regulations and no legislative oversight.
The scope of the impact of these proposed amendments is
potentially expanded by what would constitute a “foreign state,” which is
governed by the State Immunity Act. The State Immunity Act provides
an expansive definition of a foreign state, as it includes a sovereign or head
of the state or any political subdivision (this could include presidents, state
governors or provincial premiers); any
government or subdivision of the foreign state, including any of its
departments, and any “agency” of the foreign state (meaning any legal entity
that is an “organ” of the foreign state but that is separate from the foreign
state); and, lastly, any “political subdivision” (meaning a province, state or
other like political subdivision of a foreign state that is a federal state).
Even with only two states currently listed, one could imagine that there are
still a significant number of ultimate entities from which charities need to
avoid accepting gifts.
This proposed unilateral executive power to refuse
registration or deregister that the Minister will have under Budget 2014 is without
any specific review or appeal process, or access to the evidence relied on by
the Minister. This new power would be in addition to the Minister’s similar
deregistration power under the Charities Registration (Security Information)
Act, a process by which a charity may be refused registration or have its
registration revoked under the certificate process. This certificate process
may be controversial (a similar process has been struck down by the Supreme
Court in the immigration context), but still has a limited appeal and review
process within it (for more information see www.antiterrorismlaw.ca).
Budget 2014 also contemplates that CRA will “provide
information about best practices” for exercising due diligence when “accepting
gifts and for preventing terrorist abuse of the registration system for
charities.” This should prove to be an important policy document to come
considering the increasing due diligence burdens on registered charities and
burgeoning executive powers of the Minister of National Revenue to block
registration of charities and/or revoke existing charitable registration.
5. Consultation on Non-profit Organizations
Non-profit organizations (“NPOs”) are entities that are
exempt from income tax but are not charities. NPOs are generally defined to be clubs,
societies or associations that are organized and operated solely for social
welfare, civic improvement, pleasure or any other purpose except to make a
profit. NPOs include groups such as professional associations, recreational
clubs, civic improvement organizations, cultural groups, housing corporations,
advocacy groups and trade associations. Budget 2014 raises concerns that some organizations
that claim NPO status earn profits that are essential to accomplish their
non-profit purposes and, therefore, have additional funds to provide income to
members or to create inappropriately large reserve funds. Additionally, there
have been concerns that the limited reporting requirements for NPOs do not
allow the Canada Revenue Agency or the public to properly assess the activities
of NPOs. In Budget 2014, the government indicates its intention to review
whether the tax exemption for NPOs is appropriately targeted and whether there
are “sufficient transparency and accountability provisions in place.” This
review will only be conducted on NPOs, not on registered charities or RCAAAs.
In order to conduct the review, the government will be seeking comments on its soon
to be released consultation paper and will consult with the appropriate
stakeholders.
6. Reducing the Administrative Burden on Charities
and other Investments in the Charitable Sector
a) Electronic Filing of Applications for Registered
Charity Status and the Annual Charity Information Return
Budget 2014 proposed certain investments
in order to “reduce the administrative burden on charities and measures to
enhance public awareness of tax incentives for charitable giving.” In this
regard, Budget 2014 proposed that funding be provided to CRA “enabling
charities to apply for registration and file their
annual information returns electronically.” These measures are estimated to
cost $23 million over five years.
Given the fact that a charity may lose
its registered charity status if it fails to file the annual information return
within 6 months of its year end, the ability to file electronically will more
than likely be a welcome relief for the sector when the ability to do so
becomes available. Many charities can become concerned when filing their annual
return by mail or courier near the deadline. The ability to file electronically
should alleviate this concern.
b) Amendments to the Criminal Code for
Charitable Gaming
Although charitable gaming is generally within the
jurisdiction of the provinces, since the regulation of gambling is a matter
dealt with in the Criminal Code, charities are also restricted by
federal law. In
this regard, Budget 2014 recognized that restrictions within the Criminal
Code on charitable gaming “forces charities to process and activate all sales
manually, and then send customers their tickets by mail.” In response to input
from large charities like the Heart and Stroke Foundation, Canadian Cancer
Society and Sick Kids Hospital, Budget 2014 proposes to amend the Criminal
Code so that charities may “use modern e-commerce methods for the
purchasing, processing and issuing of lottery tickets and issuing of receipts
to donors.” The Government of Canada will consult with the provinces and
territories on the amendments to be made to the Criminal Code. The
ability for charities to use modern technology to conduct charitable gaming
activities will be a great reduction in the administrative burdens faced by
charities that do such activities.
c) Social Finance Initiatives
Budget 2014 announced that the government will “continue
to work with leaders in the not-for-profit and private sectors to explore the
potential for social finance initiatives.” In doing so, Budget 2014
acknowledged that governments are “not always best placed to solve the most
pressing or persistent social and economic problems,” which although a
cathartic statement to many in the sector, it is still a welcome admission,
particularly when contained in a federal budget.
Although Budget 2014 did not include an announcement of
any specific proposals concerning social finance, it did indicate that a new
Ministerial Advisory Council on Social Innovation had been formed in December
2013 made up of experts and practitioners in the fields of social finance and
social enterprise to advise the government on possible areas of social
finance initiatives and whether there might be barriers to their success. This
consultation is similar to ones that have happened and are planned at the
provincial level. Hopefully, the federal government will coordinate efforts
with their provincial and territorial counterparts on this important area of
innovation.
d) Grants and other Initiatives in Arts, Culture
and Sports
Budget 2014 also announced investments to be made in
arts, culture and sport. These include funding of:
· $25 million for the Canada Council for the Arts;
· $30.1 million for the Canada Cultural Investment Fund;
· $30 million for the Canada Cultural Spaces Fund;
· $18 million for the Canada Arts Presentation Fund; and
· $1.8 million for the Fathers of Confederation Buildings
Trust.
As well, Budget 2014 includes ongoing funding of $9
million per year to the Canada Book Fund and $8.8 Million per year to the
Canada Music Fund. Funding for the Virtual Museum of Canada will also be raised
from the existing $2 million per year to $6.2 million, with an additional grant
of $1.2 million for the Online Works of Reference project of the museum, which
will be transferred to the Canadian Museum of History.
To coincide with the current Olympics and in anticipation
of the 2015 Pan American Games and Parapan American Games in Toronto, the
government also announced grants to Sport Support Canada for a total of $23
million dollars. As well, Budget 2014 proposed to amend the current rules for
amateur athlete trusts “to allow income contributed to an amateur athlete trust
to qualify as earned income for the purposes of determining an athlete’s annual
RRSP contribution limit. This will provide a particular benefit to amateur
athletes who are members of an RCAAA and can establish an amateur athlete
trust. Given that the measure will apply to contributions made after 2013 and
the current Olympics, the proposal appears well timed.
C. CONCLUSION
For a budget that few anticipated would
contain substantive changes other than a general threat of harsher provisions in
order to stop charities becoming involved in terrorist financing, Budget 2014
contains a surprising amount of substance for consideration. Although the
proposed initiatives contained in Budget 2014 include more detail than what the
Notice of Ways and Means Motion does, the initiatives that were included provide
much upon which the sector may reflect. In particular, Budget 2014 signals that
the federal budget in 2015 may contain a significant revision of the section
149(1)(l) of the ITA concerning non-profit organizations, and as such it will
be important that such organisations carefully follow this development over the
next year.