New rules of charitable tax policy
The budget changes have passed as originally proposed in February 2011. For charitable organizations and donors, these changes are met with mixed reviews.
For decades, the federal government has proactively encouraged Canadians to increase charitable contributions by enhancing the tax benefits of such gifts. Since 1996, there have been a number of new tax measures introduced, including following:
- Increasing the annual charitable contribution limit from 20% to 75% of net income and 100% at death;
- Permitting a charitable tax credit in the year of death where the donor directly designates a charity as the beneficiary of insurance proceeds as well RRSP, RRIF and TFSAs benefits; and
- Eliminating any capital gain on the gift of qualifying public securities to a charity.
However, continued growth in the charitable sector and a number of high profile incidents of abuse of the charitable rules, has resulted in increased scrutiny by the regulators. The 2011 budget brings further changes to the regulatory regime affecting charities and empowers the Canada Revenue Agency (CRA) with an more regulatory authority including the ability to refuse or revoke registration for a charity where one of its directs has been convicted of a financial or otherwise relevant crime, was previously a director of a charity revoked for cause or was a promoter of a donation tax shelter which was revoked.
In addition to this heightened regulation, the budget focused on closing what many considered to be excessive potential tax loop holes, such as the current “double-dipping” involving gifts of flow through (FT) shares. Here is a brief summary of some of the key changes that advisors and donors should note.
Donation of flow-through shares
The budget eliminated part of the tax benefit that existed where a Canadian taxpayer buys a FT and then donates it to charity. The taxpayer continues to benefit from the allocated FT resource deduction and the charitable donation tax credit, but is now going to be taxed on the capital gain equal to the lesser of the FMV and the original cost of the shares.
The effective date of this proposal remains March 22nd 2011 and suffice to say that even when you add the tax on the capital gain to the cost of the gift, gifting FTS under the new rules is still a tax effective way to make a donation.
Subscription agreements prior to this date are not affected, but charitable owners of FT’s should be aware of the impact this budget may have on their future donation plans and the possible time limit on being able to take advantage of the capital gain exemption of a FTLP donation.
Recovery of tax assistance for returned gifts
The budget clarifies what happens in terms of the tax consequences when a charity returns a gift to a donor. This is difficult for a charity to do, but the new rules deem the gift not to have occurred. If the returned property is not identical, then the person is deemed to have disposed of the original property at the time the person acquires it back from the charity. CRA is now permitted to reassess a tax return of any person outside the normal reassessment period and disallow a taxpayer’s claim for a credit or deduction in any situation where the gifted property is returned to a donor in order to ensure “that tax assistance is not improperly retained”.
Gifts of options
The Budget introduced provisions designed to delay the recognition of a gift where an option to acquire a property is granted to a qualified donee. Prior to the introduction of these provisions, where a donor granted an option in a property to a charity, a receipt could be issued and the gift was recognized immediately for the value of the option.
Now, where a donor issues an option to a qualified donee, the recognition of the resulting gift is delayed until the option is exercised by the charity.
Where any consideration paid by the qualified donee to the donor to acquire the option or the property exceeds 80 per cent of the fair market value of the underlying property, the exercise of the option will not be considered to be a gift unless the donor can establish that the granting of the option and the exercise thereof was made with the intention of making a gift to a qualified donee. The proposed provisions also deal with the value of the gift for receipting purposes when the option is exercised, and where the option is disposed of by the qualified donee prior to being exercised, the proceeds of disposition to the donor and the value of the gift for receipting purposes.
Non-qualifying security Anti-Avoidance Rules
The Budget beefed up the rules regarding donations of NQS (defined as a private company share, debt obligation or other security). These rules prevent a person from receiving a donation tax receipt of a NQS. Previously NQS rules applied to private foundations and charities not at arm’s length to the donor. Now NQS rules apply to all registered charities. If the NQS is not disposed of within 5 years, there will be no tax recognition of the gift.
Plus, tax recognition is now deferred until the recipient charity disposes of the NQS for consideration (cash) that is not another NQS of any person. In other words, the new rules catch situations where through a series of transactions a donor avoids the application of these rules.
Sources: CAGP Federal Budget 2011 News Release, PWC’s Tax Memo March 2011, Miller Thomson LP’s Charities and Not-For-Profit Newsletter of March 2011 and Carters Charity Law Bulletin No. 245 of March 30, 2011