Federal Bill C-32: What’s Relevant for Charities?

The Federal government introduced Bill C-32 earlier this month. The House Standing Committee on Finance is taking a close look at Bill C-32 as is the Senate Standing Committee on National Finance. 

What is Bill C-32?

The full name of the Bill is a mouthful: “An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 3, 2022 and certain provisions of the budget tabled in Parliament on April 7, 2022.”

In other words, it’s an act to implement budget and fall economic statement spending promises.

What’s Relevant for Charities?

As with most budget bills, this is a long one. This post is not an exhaustive overview. Instead, we’ve picked out a few items that will be of interest for charities.

DISBURSEMENT QUOTA

Increase to 5% for Property Exceeding $1M

Bill C-32 changes the definition and calculation of disbursement quota (DQ) in the Income Tax Act (ITA).  As promised in the 2022 Federal Budget, the DQ increases from 3.5% to 5% for the portion of property not used in charitable activities or administration that exceeds $1M.

This change is effective for tax years beginning on or after January 1, 2023.

See section 34(1) of Bill C-32; section 149.1(1) ITA.

Management & Administration Not Included

Bill C-32 clarifies that “expenditures on administration and management of the charity” are not deemed to be an amount spent on charitable activities or a gift to a qualified donee (basically, another charity). In other words, these costs don’t count toward a charity’s obligation to meet its DQ.

This change is effective for tax years beginning on or after January 1, 2023.

See section 24(2) of Bill C-32; *new* section 149.1(1.1)(d) of ITA

Discretionary Reduction in DQ

Bill C-32 amends the wording around the Minister’s discretionary reduction of the DQ.

In its current form, when the Minister agrees to reduce the disbursement quota for a charity’s tax year, the amount is “deemed to be an amount expended by the charity.” The new version will have the Minister “specify an amount” and the “disbursement quota shall be deemed to be reduced by that amount.”

Charities must still apply and the Minister still has discretion to grant or not grant the reduction. It’s simply that the prescribed amount is now deemed a reduction rather than an amount expended.

See section 34(4) of Bill C-32; section 149.1(5) ITA

Disclosing Applications for Reduction in DQ

The government can disclose “to any person” the application, information filed in support of a charity’s application, and a partial or full copy of any letter or notice from the Minister to the charity about its application to reduce its DQ.  This change is effective January 1, 2023.

This change is effective for tax years beginning on or after January 1, 2023.

See section 55(1) Bill C-32; s 241(3.2) ITA.

ACCUMULTATION OF PROPERTY

The section allowing charities, with the Minister’s approval, to accumulate property for a specific purpose, on specific terms and conditions, for a specific time, has been repealed.

This change is effective for applications made on or after January 1, 2023.

See section 34(5) of Bill C-32; former section 149.1(8) ITA

TRUST REPORTING

New Trust Reporting Requirements

In section 150(1.1) of the ITA, there is an exemption (s 150(1.1)) to filing required information returns. Bill C-32 changes that section so that there are more kinds of trusts that have to file T3 returns, unless the trust fits into a list of exceptions.

Content of Trust Reporting

Required information for trust reporting is listed in the Income Tax Regulations (ITA Regs). It includes:

• Name, address, date of birth, jurisdiction of residence, taxpayer identification number for each person who is a trustee, beneficiary, or has the ability to exert influence over trustee decisions (re: appointment of income or capital of the trust)

The required information about beneficiaries includes those “whose identity is known or ascertainable with reasonable effort by the person making the return at the time of filing” (s 204.2(2)(a) ITA Regs).

See section 72(1) Bill C-32; section 204.2 ITA Regs

Exceptions to Trust Reporting Requirements

What are those exceptions? There are a lot of them. If the trust:

• Has existed for less than 3 months
• Holds assets of less than $50K through the year and if the assets are one or more of:
  • Money
  • Debt obligation (see (a) of “fully exempt interest” in 212(3))
  • Share, debt obligation or right listed on a designated stock exchange
  • Share of capital stock of a mutual fund corporation
  • Unity of a mutual fund trust
  • An interest in a related segregated fund trust
  • An interest as a beneficiary under a trust with all units listed on a designated stock exchange
• Is required by law (federal, provincial, or rules of professional conduct) for the purpose of the activity regulated by those laws
• Is a registered charity
• Is a club, society or association
• Is a mutual fund trust
• Is a related segregated fund trust
• Is a trust with all units listed on a designated stock exchange
• Is prescribed to be a master trust
• Is a graduated rate estate
• Is a qualified disability trust
• Is an employee life and health trust
• Is a trust under/governed by a deferred profit-sharing plan, pooled registered pension plan, registered disability savings plan, registered education savings plan, registered pension plan, registered retirement income fund, registered retirement savings plan, tax-free savings account, employee profit sharing plan, registered supplementary unemployment benefit plan, first home savings account
• Is a cemetery care trust or trust governed by an eligible funeral arrangement

See section 35(1) Bill C-32; *new* section 150(1.1) ITA

Clarifications

A trust includes bare trusts and arrangements. What is a bare trust? A bare trust is one where the trustee’s “only function is to hold legal title to the property,” where that title is subject to the control and instructions of the beneficiary.

See section 35(2) Bill C-32; *new* section 150(1.3) ITA

The reporting does not require disclosure of information subject to solicitor-client privilege.

See section 35(2) Bill C-32; *new* section 150(1.4) ITA

Consequences for False Information or Omission

A person or partnership that fails to file a required trust return or makes a false statement (knowingly or due to gross negligence) is subject to a penalty equal to the greater of:

• $2,500 or 5% of the highest amount of the total fair market value of all property held by the trust.

See section 41(2) Bill C-32; *new* section 164(5), (6) ITA

Effective Date

This change is effective for tax years that end after December 30, 2023, one year later than in previously-released draft legislation.

CRA INFORMATION-GATHERING AUTHORITY

Earlier this year, during the Federal Finance Consultations on draft tax proposals, we fully explained the background of the changes to CRA’s information-gathering authority. In short, these changes respond to a 2019 Federal Court of Appeal decision (Cameco) that ruled the Minister of National Revenue exceeded its authority when CRA auditors compelled a corporation’s employees to give answers in an oral interview.

According to the Charter statement about Bill C-32, the amendments are to “modernize the information-gathering power” in s 231.1 and to clarify that, during an audit, people may be required “to attend at a place designated by the [government] authorized person or by video-conference and to answer the questions orally” [emphasis added].

See section 54(1) of Bill C-32; section 231.1(1) ITA