Penny Donations Encouraged

The Budget indicates that the Federal Government will cease distributing new pennies, given that each penny costs 1.6 cents to produce.  While existing pennies will continue to have value indefinitely, the Budget suggests that the Federal Government will work with charities and other institutions like Imagine Canada, to arrange fundraising campaigns around the elimination of the penny.

We assume that "penny fundraising" will take place almost entirely without official donation receipts being issued – relying on a mix of pure philanthropic motives and a desire to put penny jars to better use.  Given the absence of any tax credit in penny fundraising, donors may well be more willing than usual to make gifts to non-charitable non-profit organizations.  Thus, non-profit organizations should be particularly aware of this (small) fundraising opportunity.

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Budget Introduces New Rules Regarding Political Activities by Registered Charities

The Budget proposes new rules impacting the ability of charities to engage in political activities and requiring new disclosure rules on political activities.

Current rules re political activities

Charities in Canada advocate regularly on many issues of public policy.  Much of that activity falls within the realm of charitable activity and is widely recognized as a positive for our communities.  The Income Tax Act also permits registered charities to engage in limited non-partisan political activities that are ancillary and incidental to their charitable purposes.  “Political activities” are generally understood to include any activities intended to promote the change or retention of any law or policy of any level of government (whether Canadian or foreign), or to encourage the public to contact any public official with a view to promoting changes in the law or policy.  However, a charity’s political activities cannot be partisan (directly or indirectly support, or be in opposition to, any political party or candidate for public office).

Proposed changes

While the Federal Government acknowledges that charities play a valuable role in the development of public policy in Canada, it indicates that there is a need to ensure that charities respect the limits on political activities which are currently in the Income Tax Act.  The Federal Government also sees a need for greater transparency in respect of these activities.  These concerns appear to be driven by a perceived increase in foreign funding of charities engaged in advocacy activities, particularly in relation to environmental issues like pipeline approvals. 

The Budget proposes a new definition of “political activity” that includes the making of a gift to a qualified donee if it can reasonably be considered that a purpose of the gift is to support the political activities of the qualified donee.  The definition of “charitable purpose” will also be revised to exclude gifts to qualified donees that constitute political activities under the new definition.

The result of these changes is that grants to qualified donees that can be considered to be made in support of the donee’s political activities will be considered expenditures by the donor charity on political activities and these expenditures will be included in the calculation of the resources of the donor charity devoted to political activities.

The Federal Government is also proposing that the CRA increase the required reporting that charities must make on political activities, including the extent to which such political activities are funded by foreign sources.  The Budget does not provide detail on the increased reporting that will be required, but we expect that charities will be required to disclose the amounts received from foreign sources for political activities, and possibly the identities of the foreign donors.

Intermediate sanctions for political activities are introduced by the Budget. These will allow the CRA to penalize Canadian charities or RCAAAs and for excess expenditures on political activities where under the current provisions of the Income Tax Act revocation was the only sanction available.

Further, the CRA will be granted the ability to suspend the tax-receipting privileges of a charity or RCAAA that provides incomplete information in its annual information return until the charity provides the required information.  The impetus for this latter provision appears to be to ensure that charities file all required information regarding political activities, but depending on how the legislation is drafted, it could potentially be applied to any incomplete information on a T3010 Return.

Comments

These rules raise several issues of concern.  In particular, it is unclear when a grant to a qualified donee will be considered to be made with “a purpose” of supporting the political activities of the qualified donee.  Many qualified donees engage in small amounts of political activities in support of their charitable mission. Will all gifts to these organizations be considered to have been made with a purpose of supporting these political activities, or only gifts specifically earmarked for political activities?  If all gifts are caught, will the entirety of the gift be considered an expenditure on political activities, or only the portion of the gift that corresponds with the proportion of political activities of the donee?  Furthermore, how is a charity to know whether and to what extent a qualified donee engages in political activities, and as of when must this be determined (a problem that is only compounded when considering that if the donee is a registered charity, it may itself have made grants to other qualified donees which are deemed to be expenditures on political activities under the new rules)?

Without clarity on these issues, a charity may find itself offside the new restrictions on political activities without knowing it and without an option to avoid it, short of ceasing all funding of qualified donees. At a minimum, the calculation of resources spent on political activities has become dramatically more complicated and difficult.  We expect that Canadian grant making charities should begin using granting agreements designed to provide explicit limitations on the recipients’ political activity.

It is difficult to comment on the proposed increased reporting requirements in the absence of specific details on what will now be required to be disclosed.  However, such increased disclosure naturally raises potential privacy concerns on the part of foreign donors that have a legitimate interest in not having their donations made public.

We will continue to monitor these rules and any CRA commentary on them.  It is hoped that the rules will be revised before being enacted to provide greater clarity on their interpretation and application, and to ensure that charities are not subjected to an unreasonably onerous reporting regime in respect of political activities.  Nonetheless, given the political climate and these new rules, foreign charities funding advocacy in Canada and Canadian charities funding or doing advocacy (particularly environmental advocacy) should be very careful.

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Gifts to Foreign Charitable Organizations

The Budget also proposes changes to the process by which foreign organizations that have received a grant from the Federal Government will be considered qualified donees under the Income Tax Act.

Current rules

Generally, non-Canadian organizations are not qualified donees under the Income Tax Act. Thus, Canadian donors cannot obtain charitable donation tax credits or deductions for gifts to them, and registered charities are not permitted to make outright grants to them. 

An exception exists, however, for foreign charitable organizations that have received a gift from the Government of Canada in the 36 month period beginning 24 months before that time.  These organizations are deemed to be qualified donees under the Income Tax Act. As qualified donees, these foreign charitable organizations may issue official donation receipts for gifts from Canadian donors. Canadian registered charities may also make gifts to foreign charitable organizations that are qualified donees.

Proposed changes

The Budget proposes that foreign charitable organizations that receive a gift from the Federal Government may apply for qualified donee status if they pursue activities:

• related to disaster relief or urgent humanitarian aid; or
• in the national interest of Canada.

The Minister of National Revenue, in consultation with the Minister of Finance, will have the discretionary power to grant qualified donee status to a foreign charitable organization that meets these criteria. Qualified donee status will be public, and will last for a 24-month period beginning generally no later than the date of the gift from the Federal Government.

Foreign charities that have qualified donee status under the existing rules by virtue of having received a Federal government gift will continue to be qualified donees until the expiration of the period of their current status.

The Budget documents state that the CRA will develop guidance regarding the administration of this measure.

This measure will apply to applications made by foreign charitable organizations on or after the later of January 1, 2013 and Royal Assent to the enacting legislation.

Comments

The Federal Government states that the new rules will ensure that qualified donee status is granted only to approve foreign charitable organizations that carry out activities of significance to, and in the interest of, the Canadian public. While this goal is laudable in principle, presumably any foreign organizations that have received grants from the Federal Government are carrying out activities determined by the Federal Government to be in the interest of the Canadian public. We believe that this change is actually seeking to ensure that the foreign qualified donee status is limited to specific large foreign charities that will now be more clearly under the authority of the Canada Revenue Agency.   Note as well, that this change accepts a recommendation of the 1990 Report of the Auditor General of Canada to the House of Commons.

Donors and charities considering grants to foreign organizations should continue to consult the list of qualifying foreign organizations in Information-Circular 84-3R6.  Note that this list, which we believe to be incomplete, will now become official.  We will monitor any CRA commentary on the new registration regime, and will report any developments in this Newsletter.

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GST Rebate for Acquisition of Books for Free Distribution

The Budget proposes a new incentive to encourage the promotion of literacy by registered charities and certain non-profit organizations. 

Current rules

The Excise Tax Act currently provides for a rebate of the GST (and the federal portion of the HST) for certain books and related items (including audio recordings and printed scripture) acquired by public libraries, educational institutions, as well as charities and qualifying non-profit organizations prescribed by regulation whose primary purpose is the promotion of literacy.

Currently, however, the rebate does not apply to tax paid on printed books purchased to be sold or donated.

Proposed changes

Under the Budget proposals, charities and qualifying non-profit literacy organizations prescribed by regulation will be allowed to claim a rebate of the GST (and the federal portion of the HST) paid to acquire printed books to be given away.  The rebate applies to the acquisition of the following:

• printed books or updates of such books;
• audio recordings all or substantially all of which consist of a spoken reading of a printed book; and
• bound or unbound printed versions of the scripture of any religion.

The Budget states that this change will allow those literacy organizations prescribed by regulation to claim a rebate of tax paid on printed books, where, for example, such books are purchased to be given to children from low income households who might not otherwise be able to afford them.

This measure will apply to acquisitions and importations of printed books in respect of which tax becomes payable after Budget Day.

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New Promoter Penalties Related to Charitable Donation Tax Shelters

The Budget proposes various new rules and penalties related to tax shelters generally, as well as some changes specific to charitable donation tax shelters. 

Current rules

The Income Tax Act requires that all tax shelters be registered and obtain a tax shelter identification number.  The Income Tax Act imposes a penalty on any person (normally the tax shelter promoter) who sells an interest in, or accepts consideration in respect of, a tax shelter that is not registered with CRA, or who files false information in an application to register a tax shelter. Correspondingly, a participant in the tax shelter is denied any related claim or deduction until the tax shelter is registered and the penalty is paid.

The penalty is currently the greater of $500 and 25% of the consideration received or receivable in respect of the tax shelter. The Budget materials use the following example; if a participant were to pay $12,000 to acquire from a promoter a property that is an unregistered tax shelter, the penalty to the promoter would equal $3,000.

Proposed changes

The Budget states that, in the context of some charitable donation tax shelters, the cost to participants of the property acquired is relatively small in relation to the tax savings that the promoter asserts are available to participants. The result therefore is that the penalty may be less effective in encouraging compliance by the promoter.

The Budget proposes that in the case of a charitable donation tax shelter, this penalty will be the greater of 25% of the amount asserted by the promoter to be the value of property that participants in the tax shelter can transfer to a donee, or the amount determined under the existing rules.  Thus, to take the example above, if a participant in a donation tax shelter pays $12,000 and is advised by the promoter that he or she will be able to claim that donated property has a value of $100,000, the penalty for the promoter if the tax shelter is not registered will be $25,000.

This measure will generally apply on Royal Assent to the enacting legislation.

Additional Measures

A promoter is required to file an annual information return if he or she accepts consideration, or acts as a principal or agent, in respect of a tax shelter.  This return must include the amount paid by each participant who has acquired an interest in the tax shelter. Failure to file results in a penalty equal to the greater of $100 and $25 multiplied by the number of days that the return is outstanding, to a maximum of $2,500.

The Budget proposes that an additional penalty be imposed if a promoter fails either:

• to file an annual information return in response to a demand by CRA; or
• to report in the return an amount paid by a participant in respect of the tax shelter.

The new penalty will be equal to 25% of the consideration received or receivable by a promoter in respect of all interests in the tax shelter that should have been, but were not, reported in an annual information return.   In the case of a charitable donation tax shelter for which amounts paid by the participants are not reported, the penalty will be the greater of 25% of the consideration received or receivable by the promoter and the amount asserted by the promoter to be the value of the property that those participants can transfer to a donee.

This measure will apply to demands to file made by the CRA after Royal Assent to the enacting legislation, and to returns filed after Royal Assent to the enacting legislation.

The Budget also proposes to make tax shelter identification numbers valid only for the calendar year identified in the application for the number filed with the CRA.  This is in contrast to the current approach in which tax shelter identification numbers are valid indefinitely.

This measure will apply to applications made on or after Budget Day. Tax shelter identification numbers issued as a result of applications made before Budget Day will be valid until the end of 2013.

Commentary

While it may be difficult to be critical of measures designed to hold accountable promoters of abusive tax shelters, the definitions of tax shelters and promoter are broad and it is certainly possible that they could catch relatively innocent but mistaken charities and their staff.

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No New Donation Incentives

Unfortunately for the sector, the Budget does not include any new measures to increase incentives for charitable giving notwithstanding that the 2011 Federal Budget confirmed that the Standing Committee on Finance study how current incentives for charitable giving might be enhanced or improved.

The Budget confirms that the Standing Committee on Finance is continuing its review of charitable donation incentives.  Since its request for submissions from the public in January 2012, it has received numerous proposals for new measures to increase public giving.  These have included a charitable donation stretch credit – in which increases in giving from year to year receive increased tax recognition – as well as the extension of the exemption from capital gains tax to donations of private company shares and real property.

These measures, it appears, will need to wait until at least 2013.   We remain hopeful that the Standing Committee will recommend at least some additional donation incentives and that the Federal Government will include such measures in next year’s Budget.  We will continue to monitor developments in this area.

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Voluntary Sector Spending Initiatives

The Budget contains a number of spending initiatives relevant to the voluntary sector.  Some of the more interesting include the following.

Innovation

The Budget puts significant emphasis on innovation as an economic engine.  One important area of innovation in the Budget is the encouragement of researchers, primarily at charities like major research universities, to commercialize pure and applied research findings.  This is proposed to be accomplished in part by encouraging businesses and academics to work more closely together.

Education and Research

The Budget proposes specific targeted research grants to various medical and other research charities.  It also proposes more generally an additional $500 Million over 5 years to the Canada Foundation for Innovation.

Youth Employment

The Budget proposes $50 million in additional funding for youth employment.  Given that the examples of successful youth employment programs in the budget materials all involve charities or non-profit organizations, this measure may support significant youth hiring in the voluntary sector.  Similarly, the Budget allocates $30 million toward employment programs for people with disabilities.

Social Finance

The Budget confirms that the Federal Government views social finance as being important and will continue to seek ways to better support social capital flow, with details to be developed by the Minister of Human Resources and Skills Development over the next few months.

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Non Profit Tax Exempt Entities

Absent from the Budget is any proposal to alter the current regime that exempts non-profit organizations that are not charities, from tax on their income.

Organizations that do not otherwise qualify as charitable but are otherwise organized for social welfare, civic improvement, recreation or any purpose other than profit, are exempt from tax under paragraph 149(1)(l) of the Income Tax Act.  This long standing exemption from tax (it was originally enacted in 1917) has come under much greater Canada Revenue Agency scrutiny in the past few years. 

The Canada Revenue Agency is engaged currently in a program of auditing non-profits across Canada.  It is understood at this time that the audit initiative would target 1400 organizations and is an information gathering program to give the government a better understanding of the revenue generation activities pursued by tax exempt non-profit organizations. 

Some in the sector were concerned that the Government would introduce changes to the non- profit tax exemption provisions in this Budget.  It did not.  We continue to encourage the Department of Finance and the Canada Revenue Agency to consider entering into a dialogue with sector organizations if they have concerns in this area before making ill-conceived changes to the current regime.

Those who are interested in reading about other sections of the Budget may wish to consult Miller Thomson's general Budget Release, available here.

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Dernières nouvelles

Amanda Stacey spoke on "Charitable Gifting with Life Insurance" at the Federated Press Tax-Effective Planning for Insurance & Investment session held on February 28, 2012 in Toronto, Ontario.

Robert Hayhoe presented “Charity Law” to Altravest Board Match Leader on March 22, 2012 in Toronto, Ontario.

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