The 2014 Budget introduces a wide array of changes that will impact the Charitable and Not-for-Profit Sector.
These changes fall into several categories. Some are new measures to encourage donations and increase flexibility for donors in planning their charitable giving, while other measures are intended to reduce the administrative burden on charities. Finally, there are proposals intended to curb perceived abuse of charities by tax shelter promoters and terrorists. Somewhat surprisingly given recent statements made by the Minister of Finance, the Budget does not introduce new measures related to charities and their pursuit of political activities.
The Government also announced consultations on possible new ways to support social finance and on the tax rules related to non-profit organizations.
As one of the measures designed to ease the administrative burden on registered charities, the Budget proposes to provide additional funding to the Canada Revenue Agency (CRA) to enable it to modernize its information technology. This modernization will enable organizations to apply for charitable registration and file their annual T3010 information returns electronically.
The availability of online filing will be welcome in the sector. Applicants for registered charity status must currently file their applications in hard copy, and registered charities must similarly file their annual returns in hard copy. Paper return filing in particular is a significant administrative burden that is not imposed on other taxpayers, who can generally file returns electronically. The shift to electronic filing will bring the tax filing system for charities in line with other taxpayers. It will also provide the CRA with much better audit screening data. It may also allow applications for registration to be processed more quickly by the Charities Directorate. Finally it will assist in assuring that the information available to the public on the CRA website is accurate.
We will look forward to announcements from CRA as to the timetable for when electronic filing will be available. However, we do note that the Budget allocation for this initiative is $23 million over 5 years.
The Government also announced that the CRA will receive funding to enhance its website (which is already quite informative) and to provide more extensive information to the public on charitable giving trends and characteristics in Canada. It is hoped that making data on charitable giving and trends more accessible will enhance the public’s understanding of the charitable sector.
The sector has often noted the importance of public education relating to the nature of the sector and the extent of public support. We expect that the CRA will consult with the sector and stakeholders when determining the new content that will be added to the CRA website.
The Budget introduces a new revocation offence that is intended to curb abuse by foreign state sponsors of terrorism. The Budget proposes that any registered charity or registered Canadian amateur athletic association (RCAAA) that accepts a donation from a foreign state (or agency thereof) that is listed as a terrorist supporter under the State Immunity Act (Canada) can have its registration revoked. The Budget also proposes to give the Minister of National Revenue the discretion to refuse to register an organization as a charity or RCAAA that has accepted such gifts.
Perhaps anticipating concern over how this measure will be applied, the Budget confirms that in exercising its authority under these provisions, the Minister will take into consideration the specific facts of each case and exercise this authority in a fair and judicious manner. As lawyers we are not comforted by this.
The Budget suggests that CRA will provide enhanced information on due diligence practices that charities should adopt in order to prevent abuse by terrorist organizations. It also confirms that CRA will utilize existing compliance reporting to audit for such donations. The T3010 already contains a requirement that registered charities report gifts in excess of $10,000 received from foreign donors, which would presumably provide CRA with the information necessary to determine if a charity has accepted a gift from a foreign state that is listed as a terrorist supporter under the State Immunity Act.
Charities should ensure that they exercise care in their activities to avoid allowing their resources to fall into the hands of terrorist or criminal organizations, and to avoid being used inadvertently to launder money. CRA has already published recommended due diligence steps that charities should take in order to avoid working with terrorist organizations. Charities should review these steps carefully in addition to any new guidance that the CRA publishes. Needless to say, being found guilty of supporting terrorism carries very serious consequences, not only under the Income Tax Act (Canada) (“Tax Act”) but also under the Criminal Code. Charities should now review any proposed gifts from foreign states or foreign state agencies to confirm that the prospective donor is not listed under the State Immunity Act. A list of state sponsors of terrorism under that Act is attached as a Schedule to the Order Establishing a List of Foreign State Supporters of Terrorism annexed to and made pursuant to the Act.
This measure will apply to donations accepted on or after Budget Day.
Over the past three years, CRA conducted an NPO Risk Identification Project. This project involved audits of a broad range of non-profit organizations (NPOs) to determine their compliance with the existing tax requirements. It was expected that a report on the results of this review would be released early this year. To date, no report has been published.
The Budget, however, announces that the Government will review the scope of the current tax exemption for NPOs. NPOs constitute a broad category of tax exempt organization under the Tax Act. In order to qualify as an NPO, an organization must be organized and operated for a purpose other than profit and must not make any income available to its members. It must also not be a charity. NPOs include such varied groups as professional associations, recreational clubs, civic improvement organizations, cultural groups, housing corporations, advocacy groups and trade associations.
The Budget document indicates that concerns have been raised that some organizations claiming the NPO tax exemption may be earning profits that are not incidental to carrying out the organization’s non-profit purposes, making income available for the personal benefit of members or maintaining disproportionately large reserves. There is also a concern that NPOs are subject to insufficient transparency in their operations, given their limited reporting requirements. Frankly, we believe that many of these concerns are overstated.
The Government intends to review whether the income tax exemption for NPOs remains properly targeted and whether sufficient transparency and accountability provisions are in place. It confirms that this review will not extend to registered charities or RCAAAs. As part of the review, the Government will release a Consultation Paper for comment and will further consult with stakeholders as appropriate.
NPOs should therefore watch both for the Report from the NPO Risk Identification Project as well as the Consultation Paper from the Government. It will be important that organizations provide their input to ensure that the Government has a full understanding of the sector and its needs, and to ensure that any changes to the rules (which appear likely on the basis of the Government’s comments) will take these issues into account.
We will continue to keep our readers apprised as this consultation process progresses.
The Budget introduces a change that is designed to curb the misuse of the regime for donations of cultural property through abusive tax shelters.
Under the Tax Act, special deeming provisions apply to gifted property that was acquired by the donor as part of a tax shelter gifting arrangement or to property that was held by the donor for less than three years (ten years if the donated property was acquired with the intention of donation) before being donated. In these circumstances, the value of the property is deemed to be no greater than its cost to the donor. This provision is designed to prevent abusive tax shelter arrangements in which property is acquired by a donor and then donated for a purported value that far exceeds the cost of the property to the donor.
Gifts of certified cultural property have been exempt historically from this anti-avoidance rule. The Tax Act provides for a special process by which a proposed gift can be certified as “cultural property” and valued formally. Gifts of cultural property can be claimed up to 100% of income and benefit from a full capital gains exemption. This treatment is designed to encourage the donation of culturally significant property and artefacts to preserve Canada’s national heritage.
The Government has evidently determined that the official valuation and certification process for gifts of cultural property does not provide sufficient safeguards against abuse by tax shelter promoters. As such, the Budget proposes to remove the exemption noted above. Beginning on Budget Day, the value of gifts of cultural property that were acquired as part of a tax shelter arrangement or acquired shortly before the date of the donation will be deemed to have been made at no more than the cost to the donor.
While some could question whether this change was necessary, we have certainly reviewed tax shelters involving cultural property that somehow increased in value dramatically between donor acquisition and donation immediately afterward. This change is therefore consistent with the ongoing push by the Government to shut down abusive tax shelters. Charities that participate in abusive tax shelters should expect to be audited and in many cases sanctioned by CRA. Donors to most tax shelters should also expect to be reassessed and/or have their tax credits delayed until the resolution of the audit of the tax shelter. Given these risks, our general advice is for both charities and donors to avoid most donation tax shelter arrangements altogether.
This measure will apply to donations made on or after Budget Day. While the change may no doubt prevent or delay a small number of legitimate gifts of cultural property, it is perhaps understandable in the context of some of the cultural property donation schemes that have been sold in recent years.
The Budget expands upon an existing incentive for gifts of ecologically sensitive land. Under the Tax Act, donors of land that has been certified by the Minister of the Environment as “ecologically sensitive” are already eligible to claim enhanced tax recognition for such donation as compared with normal charitable gifts. Whereas tax credits or deductions for charitable donations are generally capped at 75% of the donor’s income, gifts of ecologically sensitive land can be claimed up to 100% of the donor’s income. This enhanced tax treatment promotes the donation of ecological property in an effort to protect the natural environment in Canada. In order to qualify for this special tax treatment, the certified ecologically sensitive land must be donated to the federal or provincial government, a Canadian municipality, a public body performing a function of government in Canada (often a body set up by a First Nation in the context of self governance), or to a registered environmental conservation charity that has been approved by the Minister of the Environment.
Currently, charitable donations of ecological property not claimed in a period may be carried forward for up to 5 years. Because gifts of ecologically sensitive land may be of large value, donors without significant other income may not be able to use the full tax credit or deduction within the carry-forward period. The Budget proposes to extend the carry-forward for donations of ecologically sensitive land to 10 years, thus doubling the length of the normal carry-forward period.
The Budget notes that this change was recommended by the House of Commons Standing Committee on Finance in its February 11, 2013 report. It is hoped that this change will encourage further donations of ecologically sensitive land for the preservation of Canada’s natural environment and heritage.
This measure will apply to donations made on or after Budget Day.
The Budget introduces a significant change in the tax treatment of gifts made under a Will or beneficiary designation.
Under the current rules, where an individual makes a donation by Will, the donation is treated as having been made by the individual immediately before the individual’s death. Thus, the tax credits arising from the gift are applied to the donor’s final tax return. Where the full credit cannot be used on the donor’s final return, the excess credit can be carried back and used against the previous year’s income. The tax credits that arise on gifts made by Will are available only against the individual’s last two years’ income – they cannot be used to reduce tax that arises in the estate following the donor’s death.
By contrast, where a gift is directed to be made by the donor’s estate, the gift is available only against the tax that would otherwise be payable by the estate. Estate gifts cannot be used to reduce the donor’s income in the year of death or the prior year. Distinguishing between gifts by Will and gifts by an estate requires an analysis of the terms of the Will and the extent of discretion that is afforded to the executors. As we have discussed in past Newsletter Issues, determining whether a particular gift is a gift by Will or a gift by the estate is not always easy, and the tax implications can vary significantly depending on the answer.
The Tax Act also applies similar rules where an individual designates a qualified donee as the beneficiary of proceeds on death under an RRSP, RRIF, TFSA or life insurance policy. In these circumstances, the tax credit is available only against the individual donor’s last two years’ income.
The Budget proposes to provide flexibility with respect to the tax treatment of these gifts, where they occur as the result of a death after 2015. Rather than deeming gifts by Will and gifts by direct designation to have been made immediately before the individual’s death, they will be treated as having been made by the estate. The gift will be deemed to occur when the property is actually transferred to the charity. Executors will then have the discretion to allocate the available tax credits against any of the following:
- the taxation year of the estate in the year the gift was made;
- any earlier taxation year of the estate; or
- the last two taxation years of the individual prior to death.
The Budget confirms that the current requirements for determining whether an RRSP, RRIF, TFSA or life insurance policy is a direct designation will continue to apply. Generally, this means that the transfer of property to the estate must occur as a consequence of the death of the donor, and must occur within 36 months of death.
This set of changes is welcome in that it provides significant flexibility to executors and trustees when dealing with the taxes incurred by a deceased individual and the individual’s estate upon death. While the Budget does not include specific legislative language to implement this change, it appears that the executors and trustees will be able to allocate tax credits between the estate and the deceased individual.
The new rules also reduce the legal significance of the distinction between gifts by Will and estate gifts, but they do not eliminate this issue. It appears from the Budget document that the new flexibility to allocate tax credits to either or both of the estate and the individual is only available where the gift constitutes a gift by Will. Thus, where the ability to allocate is significant, it will be necessary to determine whether the gift constitutes a gift by Will. However, the increased flexibility will mean that the trustees can use either type of gift against the estate’s tax, thus avoiding the need to analyse the nature of the gift where it is sufficient that it can be used against the taxes arising in the estate.
This measure will apply to the 2016 and subsequent taxation years. It will be interesting to review the details of the legislation when released. Only then will we be able to determine the scope of the new flexibility more definitely. Although the proposal as announced is one that will be welcomed by the sector and estate planners, it is not clear whether the Budget proposals will deal with issues that can arise with the availability of tax credits for donations made from a spousal testamentary trust on the death of the spouse beneficiary. It is hoped that the legislation in its final form will address this issue.
As a further measure designed to increase the efficiency of registered charities, the Budget proposes to revise the provisions of the Criminal Code that impose restrictions on how charities can conduct lottery sales in support of their causes. Under section 207(4)(c) of the Criminal Code, charities are not permitted to operate any charitable gaming activities including lotteries “on or through a computer.” Charities are therefore required to process and activate all sales manually and send customers their tickets by mail.
The Budget proposes to amend the Criminal Code to permit charities to conduct various aspects of lotteries through the use of computer technology, including the use of e-commerce for purchasing, processing and issuing of lottery tickets and issuing receipts to donors.
The Budget notes that several prominent Canadian charities that run large charitable lotteries have urged this change, which will significantly lower the administrative costs of operating these programs. The Budget also confirms that it will engage in consultations with the provinces and territories on the proposed amendment to the Criminal Code.
We will keep our readers advised as this issue progresses.
The Report by the House of Commons Standing Committee on Finance, which was released in February 2013 reviewed a range of options to encourage charitable giving in Canada and made recommendations related to reducing administrative burdens and improving public awareness. Several of the measures in the Budget are in response to this Report, including the extension of the carry-forward period for donations of ecologically sensitive property and the proposed increased flexibility for gifts by Will. Enhancements to the CRA website and the investment in electronic filing of T3010 Annual Returns and applications for charitable status are also in response to this Report.
The Government confirmed that it intends to continue its efforts in areas identified by the Report. It is hoped that further measures to increase donations in Canada and to enhance the ability of charities to carry out their operations will be forthcoming in future Budgets.
The Minister of Employment and Social Development established a new Ministerial Advisory Council on Social Innovation in December 2013. The purpose of the Advisory Council is to work with leaders in the not-for-profit and private sectors to explore the potential for social finance initiatives and examine whether there are barriers to their success. The Advisory Council is staffed by experts and practitioners in the fields of social finance and social enterprise.
The Budget confirms the Government’s commitment to innovative solutions to address unmet social and economic needs in social finance and social enterprise.
The Government committed to continued investment in Arts, Culture and Sports in the Budget. More particularly, the Government committed to renew Arts funding beginning in 2015/2016 which funding shall include $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 Building Trust. In addition, the Government committed to supporting the Canada Book Fund at a rate of $9 million per year, the Canada Music Fund at a rate of $8.8 million a year and to support the Virtual Museum of Canada and Online Works at $4.2 million per year.
Finally, the Government committed to maintaining its record level of support for Sport Canada by committing ongoing funding of $23 million per year for the Sport Support Program which includes $11 million targeted for winter sports through Own the Podium, $6 million targeted for team sports, $5 million for the Canadian Paralympic Committee and $1 million for Special Olympics Canada.
The Budget provides a number of funding envelopes for science and technology research. For example, colleges and polytechnics are given $10 million over two years to support the research needs of local “organizations”. While we have no detail on this proposal, the fact that it is targeted at organizations and will be administered by the Social Science and Humanities Research Council may suggest that charities and non-profits may be able to benefit from this research. The Budget also provides research and education grants to various specific charities such as the Earth Rangers Foundation, the TRIUMF Physics research facility at the University of British Columbia and the Institute for Quantum Computing at the University of Waterloo.