The 2015 Federal Budget, tabled by Finance Minister Joe Oliver, contains a few measures aimed at supporting charities. Specifically, Budget 2015 proposed measures that allow charities to diversity their investments by permitting them to invest in limited partnerships; provide a capital gains tax exemption for the donation of proceeds from the disposition of private corporation shares and real estate; and allow Foreign Charitable Foundations, in certain circumstances, to be registered as “qualified donees”.
Investments By Registered Charities In Limited Partnerships
Budget 2015 implemented a long-awaited measure whereby a registered charity will no longer be considered to be “carrying on a business” solely because it acquires or holds an interest in a limited partnership. Registered charities designated as charitable organizations or public foundations are prohibited from “carrying on a business” unless that business qualifies as a "related business", and typically, investments in limited partnerships do not meet the "related business" test. Furthermore, registered charities designated as private foundations are prohibited from carrying on any business at all. If a registered charity fails to abide by these restrictions, they can be subjected to sanctions, including the suspension of receipting privileges and the revocation of registered charity status.
This measure allows registered charities to further diversify their investment portfolios by limiting the scope of what is considered “carrying on a business”. However, to ensure that a registered charity’s investment in a limited partnership remains a passive investment (as opposed to the carrying on of a business), this measure will only apply if: the charity is at arm’s length with each general partner of the limited partnership; and the charity, together with all non-arm’s length entities, holds 20% or less of the interests in the limited partnership. In addition to registered charities, this measure also applies to Canadian amateur athletic associations.
The opportunities this measure allows for may be of particular interest to investment fund managers who have traditionally structured certain investment products as trusts rather than limited partnerships, so as to facilitate investments by registered charities.
Donations involving Corporate Shares or Real Estate
At the present time, the disposition of listed securities and ecological gifts, and the exchange of partnership units for listed securities, are exempt from capital gains tax where certain conditions are met. With the goal of further incentivising donations to registered charities, Budget 2015 proposes to expand this exemption to the proceeds from the dispositions of private corporation shares and real estate where: the cash proceeds from the disposition are donated to a qualified donee within 30 days; and the private corporation shares or real estate are sold to a purchaser who is at arm’s length with both the donor and the qualified donee to which cash proceeds are donated. This measure is set to apply to donations occurring after 2016.
In conjunction with the expansion of this exemption, Budget 2015 also proposes anti-avoidance rules such that the exemption will not be available in circumstances where: the donor, or a person not at arm's length with the donor, directly or indirectly reacquires the shares (including substitute shares) or real estate within 5 years; or with regards to a disposition of shares, the shares that were disposed of are redeemed by the corporation within 5 years and the donor is not at arm’s length with the issuing corporation at the time of redemption.
Gifts to Foreign Charitable Foundations
In addition to the aforementioned measures, Budget 2015 also proposes to allow Foreign Charitable Foundations to be registered as “qualified donees”, whereas, as the present time, only Foreign Charitable Organizations can be so registered. In order for a Foreign Charitable Organization to be eligible to register, it must receive a gift from the Canadian Government and it must be pursuing activities related to disaster relief, urgent humanitarian aid or that are in Canada’s national interest. This measure will take effect upon Royal Assent.