The Federal Budget was tabled by Finance Minister Bill Morneau on March 19, 2019 (the “Budget”). The Budget focuses on the government’s spending priorities for 2019 and into the future. The investments proposed in the Budget will create new funding opportunities for charities and non-profit organizations working in nearly every sector, including education, research, and poverty relief. It also proposes opportunities for organizations and entrepreneurs engaged in the growing field of social enterprise.
The technical tax measures in the Budget that affect the non-profit sector are limited. The most significant change is the introduction of a new category of qualified donee for non-profit Canadian journalism organizations. The Budget also broadens the definition of “cultural property”.
We are pleased to provide a summary of the highlights in the Budget affecting the non-profit sector.
Support for Canadian Journalism
The Budget builds on measures announced in the 2018 federal budget aimed at supporting Canadian journalism by introducing three new tax measures. The Budget contains draft legislation that would allow certain news organizations to register as “qualified donees” under the Income Tax Act (Canada) (the “Act”). Qualified donee status would exempt such organizations from paying Canadian income tax, allow them to issue official donation tax receipts for individual and corporate gifts, and enable them to receive gifts from registered charities. The measures also include a refundable tax credit for certain news organizations that do not become qualified donees and a non-refundable tax credit for subscriptions to Canadian digital news.
(a) Qualified Donee Status for Newspapers
Provided that it meets certain conditions, a Canadian news organization will be eligible to be registered as a “registered journalism organization” and thereby become a qualified donee by filing an application with the Canada Revenue Agency (the “CRA”). In order to be a registered journalism organization, the organization must first be designated by an independent panel as a “qualified Canadian journalism organization” (“QCJO”).
The definition of QCJO (which is relevant for each of the three measures supporting Canadian journalism) refers to corporations, partnerships and trusts that are incorporated or formed in Canada, and that meet certain conditions designed to ensure that the organization is operated or owned primarily by Canadians. For example, in the case of a corporation the board of directors must include at least 75% Canadian citizens.
In addition, a QCJO must meet the following conditions:
- it must operate in Canada, which requires that its content is edited, designed and, except in the case of digital content, published in Canada;
- it must be engaged primarily in the production of original news content and must be primarily focused on matters of general interest and reports of current events, rather than particular topics such as industry-specific news, sports, recreation, arts, lifestyle or entertainment;
- it must regularly employ two or more journalists in the production of its content who deal at arm’s length with the organization;
- it must not be significantly engaged in the production of content (i) to promote the interests or report on the activities of an organization or association (or its members), (ii) for a government, Crown corporation or government agency, or (iii) to promote goods or services; and
- it must not be a Crown corporation, municipal corporation or government agency.
In order to be eligible for qualified donee status, a QCJO must also meet the narrower definition of “qualifying journalism organization”. Status as a qualifying journalism organization is available only to a QCJO that meets the following criteria:
- it must be established as a corporation or trust and have purposes that relate exclusively to journalism;
- any business activities carried on by the organization must relate to its purposes. For example, the sale of news content and advertising would be considered activities related to journalism;
- the organization will not be permitted to distribute its profits, if any, or allow its income to be available for the personal benefit of certain persons connected with the organization; and
- to ensure that registered journalism organizations are not used to promote the views or objectives of any particular person or related group of persons, a qualifying journalism organization:
- will be required to have a board of directors or trustees, each of whom deals at arm’s length with each other;
- must not be factually controlled by a person (or a group of related persons); and
- must generally not, in any given year, receive gifts that represent more than 20 per cent of its total revenues, including donations, from any one source (excluding bequests and one-time gifts made on the initial establishment of the particular registered journalism organization).
For transparency, the names of all registered journalism organizations will be listed on the Government of Canada website. Registered journalism organizations will be required to file an annual return with CRA containing information on their activities, the names of any donors that make donations of over $5,000, as well as the amounts donated. Similar to registered charities and registered Canadian amateur athletic associations, these information returns will be public.
The Budget proposes that the new rules will apply as of January 1, 2020.
(b) Other Tax Measures in Support of Journalism
The Budget also contemplates that certain qualifying QCJOs that are not registered journalism organizations (i.e., that remain taxable organizations) will have access to a refundable tax credit on salaries or wages paid to eligible newsroom employees. The Budget proposes that this measure will apply to wages earned in respect of a period beginning on or after January 1, 2019.
Individual Canadians will also have access to a temporary non-refundable tax credit for eligible digital news subscriptions with QCJOs. The Budget proposes that this credit will be available for amounts paid for eligible subscriptions after 2019 and before 2025.
Gifts of Cultural Property
The second proposed tax measure involves the rules that deal with donations of cultural property. Currently, the Act contains enhanced tax incentives to encourage donations of cultural property to certain designated institutions and public authorities in Canada. This regime is designed to ensure that such property remains in Canada for the benefit of Canadians. The special tax incentives include no limits on the extent to which charitable donation tax credits or deductions can be claimed, as well as an exemption from capital gains tax on the disposition of the cultural property. To receive these tax benefits, the property needs to be certified as cultural property, as defined in the Cultural Property Export and Import Act (“CPEIA”). The Budget proposes to amend the Income Tax Act (Canada) and the CPEIA to change the definition of “cultural property”.
At present, to qualify for the incentives, the designated body (e.g., the charity or municipality receiving the donated property) is required to demonstrate, as part of an application for tax certification, the “outstanding significance” and “national importance” of the property. Property is considered to be of “outstanding significance” based on the following criteria: (i) its close association with Canadian history or national life; (ii) its aesthetic qualities; or (iii) its value in the study of the arts or sciences. Property is considered to be of “national importance” where it can be demonstrated that by virtue of factors such as its provenance, origin, rarity or uniqueness, its loss to Canada would significantly diminish Canada’s heritage. When submitting an application for certification of cultural property, an important part of the application requires the designated body to provide a written submission justifying the property’s outstanding significance and national importance to Canada.
The Budget proposes to make amendments to the Act and to the CPEIA to remove the requirement that the designated body demonstrate “national importance” in order for the property to be certified as cultural property.
This change results from a recent court decision that interpreted the “national importance” test as requiring that cultural property “have a direct connection with Canada’s cultural heritage”. The decision raised concerns that certain donations of important works of art that are of outstanding significance, but of foreign origin, may not qualify for the enhanced tax incentives.
This change should be welcomed by those designated bodies that are familiar with the detailed and onerous tax certification application process and for those considering applying for tax certification for cultural property.
The Budget proposes that this measure will apply in respect of donations made on or after March 19, 2019.
Social Enterprise and Social Finance
Social finance is a term used to describe the practice of making investments intended to create social or environmental impact as well as yield returns for investors. In June 2018, the Senate Committee on Social Affairs, Science and Technology released a report on social finance which recommended, among other things, that the government create a pan-Canadian social finance fund to help solve some of Canada’s most pressing issues. In the same year and in response to the report, the federal government proposed to make available up to $755 million on a cash basis over 10 years to establish a Social Finance Fund (the “Fund”) as well as to invest $50 million over 2 years in investment-ready social purpose organizations to improve their ability to participate successfully in the social finance market. The government proposed that the Fund would help charitable, not-for-profit, and other social purpose organizations access financing for projects that have a positive social impact.
The Budget contains new details on how the government proposes the Fund will work. In particular, the Budget proposes that:
- Funding will be managed through professional investment managers with expertise in social impact reporting and a proven ability to promote inclusive growth and diversity in the social finance market, to be selected through a competitive selection process in the fall of 2019.
- The fund manager(s) will invest in existing or emerging social finance intermediary organizations that have leveraged private or philanthropic capital for co-investment.
- The fund manager(s) will be required to leverage a minimum of two dollars of non-government capital for every dollar of federal investment, with the exception of investments for Indigenous-led or Indigenous-owned funds.
- A minimum of $100 million will be allocated towards projects that support greater gender equality – leveraging existing philanthropic and private sector funds towards this purpose in order to help them reduce the social and economic barriers faced by diverse groups of Canadians of all genders.
- A $50 million investment will be made in the newly proposed Indigenous Growth Fund, a fund aimed at encouraging investments in Indigenous-led businesses. The Budget contemplates that the Indigenous Growth Fund will be managed by the National Aboriginal Capital Corporations Association.
The Fund follows the lead of various provinces in Canada which have established social finance funds of their own. Sector organizations will want to pay close attention as further details emerge about the Fund and the associated opportunities.
As noted, the focus in the Budget is on spending measures and investments that the government proposes in 2019 and beyond. Many of these proposed investments will be of interest to charities, non-profits and social enterprises in different sectors. The following are among the various spending proposals in the Budget:
- The Budget contains numerous funding opportunities for organizations that carry on programs for young people in Canada. The Budget was accompanied by a Youth Book detailing the Budget measures that will impact Canadians under the age of 34. This document will interest charities focused on youth.
- The Budget contains a number of measures that will interest education charities such as increased funding for student loans, apprenticeships, and international education.
- The Budget includes a number of investments aimed at Indigenous Peoples, including allocated funding to support core governance needs of First Nations governments, a new 10-year inflation adjusted grant structure for First Nations, and investments designed to provide better access to post-secondary education for Indigenous Peoples.
- The Budget announced the largest ever increase in funding for research grants. Organizations with activities in the research field will also be interested in the announcement of increased funding for the Clean Resource Innovation Network, which carries on research to lower the oil and gas industry’s environmental impact. The Budget also announced the creation of a new Strategic Science Fund for investments in research and technology.
- Arts and culture organizations will be interested in the new Canada Cultural Spaces Fund, which contemplates new financial support for cultural infrastructure projects in Canada by investing in traditional arts and heritage facilities such as museums, theatres, and performing arts centres. The Budget also contemplates a new Canada Arts Presentation Fund, which will support not-for-profit professional performing arts organizations, including festivals and performing arts series.
- As part of the new national Poverty Reduction Strategy announced in August 2018, the Budget contemplates new funding for poverty relief programs, including programs carried on by charities and not-for-profits. This will include funding for local food infrastructure and funding for community projects that improve the lives of seniors. Notably, as part of this initiative, the Budget indicates that the government plans to move ahead with legislation to adopt an official poverty line based on a basket of goods and services that Canadians require to achieve a modest standard of living in communities across the country. This will be relevant to the definition of “poverty” used by many charities and is something to watch going forward.
Not Included in the Budget
Imagine Canada published that in the pre-Budget consultations, the charitable sector asked the government to develop a way for the general public to be able to access more data and information about the charitable sector in Canada. Some charities were asking for the government to implement a national survey and other means of data collection about the sector, as well as a way for sector data to be monitored over the long term and stored for access by the public.
The Budget does not contain any measures dealing with increased access to data and information about the sector. However, the Budget does contemplate a permanent survey for Indigenous Peoples, which will interest many charities, groups, and communities across Canada. However, there is no similar measure contemplated for the charitable sector generally.
Outside of the introduction of the new form of qualified donee, the Budget also does not include any new charitable donation tax incentives. This includes any movement on further incentivizing gifts of private company shares and real estate (which is unsurprising given that this government eliminated proposed incentives for such gifts in the 2016 federal budget).