Charity Highlights of Budget 2015

There are three items affecting charities in the 2015 Federal Budget tabled in the House of Commons by the Hon. Joe Oliver, the Minister of Finance, on April 21, 2015:

• donations of private corporation shares and real estate;
• investments by registered charities in limited partnerships; and
• gifts to foreign charitable foundations.

Exempting Donations Involving Private Shares and Real Estate from Capital Gains Tax

Presently, donations of publicly listed securities to qualified donees are exempt from capital gains tax; however, donations of private shares and real estate to registered charities and other qualified donees can give rise to taxable capital gains.

In its ongoing advocacy for charities, CCCC recommended on February 14, 2012 to the Finance Committee that the current tax treatment for donations of publicly listed shares be extended to donations of real estate.[1]  This recommendation became part of the Standing Committee on Finance’s report one year later.[2]

We are pleased to see that the Government of Canada has provided Canadians with more viable gift-giving options. Budget 2015 proposes to exempt individual and corporate donors from tax on the sale of private shares or real estate to an arm’s length party if the proceeds are donated within 30 days.

If a portion of the proceeds is donated, the exemption from capital gains tax would apply to that portion. This measure will apply to donations in respect of dispositions occurring after 2016.

Anti-avoidance rules will ensure that the exemption is not available in circumstances where, within five years after the disposition:

• the donor (or a person not dealing at arm’s length with the donor) directly or indirectly reacquires any property that had been sold;
• in the case of shares, the donor (or a person not dealing at arm’s length with the donor) acquires shares substituted for the shares that had been sold; or
• in the case of shares, the shares of a corporation that had been sold are redeemed and the donor does not deal at arm’s length with the corporation at the time of the redemption.

Where the anti-avoidance rules apply, the exemption will be reversed by including the previously exempted amount in the income of the donor in the year of the reacquisition by the donor (or the non-arm’s length person) or the redemption.

Investments by Registered Charities in Limited Partnerships

Charitable organizations are permitted to engage in “related” business activities to raise revenues.  A related business includes one linked to a charity’s purpose and subordinate to that purpose; or a business run substantially by volunteers.

Since a partnership is a relationship among persons carrying on business with a view to profit, a charity could not, until the 2015 Budget, hold an interest in a partnership.  The federal government recognizes that partnerships may be used extensively as investment vehicles to pool funding received by institutional and other large investors in order to invest in private market opportunities and is now willing to allow registered charities to invest in limited partnerships to access a wider range of investment opportunities and diversify their investment portfolios.

Budget 2015 therefore proposes to amend the Income Tax Act to provide that a registered charity will not be considered to be carrying on a business solely because it acquires or holds an interest in a limited partnership.

However, the government requires the registered charity to have only a “passive investment” in a limited partnership.  It will be a passive investment only if:

• the charity – together with all non-arm’s length entities – holds 20 per cent or less of the interests in the limited partnership; and
• the charity deals at arm’s length with each general partner of the limited partnership.

These rules would not apply to the related businesses carried on by the registered charity.

This measure applies in respect of investments in limited partnerships that are made or acquired on or after Budget Day, being April 21, 2015.

Gifts To Foreign Charitable Foundations

The 2015 Budget has broadened the spectrum of foreign charitable entities permitted to be deemed “qualified donees” under the Income Tax Act. Gifts to foreign charitable entities are no longer limited to foreign charitable organizations alone, but may be made to foreign charitable foundations as well, as long as they are:

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

Under the current legislation, only a foreign charitable organization could be a qualified donee. However, under the new legislation, the Minister of National Revenue may, in consultation with the Minister of Finance, grant qualified donee status to a foreign charitable foundation that meets these conditions. Qualified donee status will be granted for a 24-month period that begins on a date chosen by the Minister of National Revenue.

Registered foreign charitable foundations will be included on the list of registered foreign charities maintained on the Canada Revenue Agency’s website.

This measure will apply once the enacting legislation receives Royal Assent.

[1] See testimony of Barry Bussey at the February 14, 2012 hearing of the House of Commons Standing Committee on Finance.  Online:  http://www.parl.gc.ca/HousePublications/Publication.aspx?Language=E&DocId=5388812

[2] James Rajotte, MP Chair, “Tax Incentives For Charitable Giving in Canada,” Report of the Standing Committee on Finance, February 2013, 41^st Parliament, 1^st Session.  Online:  http://www.parl.gc.ca/HousePublications/Publication.aspx?DocId=5972482