On March 22, 2016, the Liberal Government tabled its first Federal Budget (the “2016 Federal Budget”). The 2016 Federal Budget includes few tax changes relating to charities and not-for-profit organizations. Specifically, there were no new tax incentives included and there were no provisions relating to the announcement in the 2014 Federal Budget that the Government would review the tax exempt status of not-for-profit organizations.
The most significant development is the announcement that the Government does not intend to proceed with the proposal in the 2015 Federal Budget to provide a capital gains exemption where proceeds of sale of private corporate shares or real estate are donated to charity within thirty days of the sale. The only relieving measure affecting charitable donations is the application of the income tax “split-receipting” rules to the Goods and Services Tax/Harmonized Sales Tax (“GST/HST”).
Apart from this, the 2016 Federal Budget confirms the Government’s intention to proceed with the ability of charities in limited circumstances to acquire or hold limited partnership interests, which was proposed in the 2015 Federal Budget. In addition, the 2016 Federal Budget confirms a commitment that the Canada Revenue Agency (the “CRA”) will engage with charities to clarify the rules governing political activities. Finally, the 2016 Federal Budget amends the charitable donation tax credit for certain trusts.
2015 Federal Budget - Donations of Sale Proceeds of Private Corporate Shares and Real Estate
The 2015 Federal Budget proposed, commencing in 2017, to exempt capital gains tax realized on the sale of private corporate shares and real estate to the extent that the cash proceeds from the sale were donated to a registered charity within thirty days of the sale. The 2016 Federal Budget announced that this proposal will not proceed. The rules relating to gifts of ecologically sensitive land and cultural property, as well as gifts of publicly-traded securities remain unchanged.
The proposed rules in the 2015 Federal Budget had been a form of relief that members of the charitable sector had been advocating for, for quite some time. It was acknowledged at the time the proposed rules were announced that they raised practical challenges and implementation issues. Notwithstanding, the announcement in the 2016 Federal Budget is disappointing as it continues the regime of more favourable tax treatment for certain kinds of donated property over others.
GST/HST on Donations to Charities
The GST/HST does not apply to a donation to a registered charity if the donor does not receive any consideration in return. However, under the Excise Tax Act, RSC, 1985, c.E-15 (the “ETA”), if the donor receives property or services in exchange for the donation, even if the value of the donation exceeds the value of the property or services received by the donor, subject to certain exceptions, the GST/HST applies on the full value of the donation.
The 2016 Federal Budget proposes to revise the GST/HST rules under the ETA to harmonize them with the “split-receipting” rules under the Income Tax Act, RSC, 1985, c.1 (the “ITA”). The “split-receipting” rules provide that where a donor makes a donation to a registered charity and receives some property or services in return, an official donation receipt may be issued for the value of the donation less the property or services received in return. Therefore, only the value of the property or service that the donor receives in return for the donation will be subject to the GST/HST, and the portion of the donation that exceeds the value of the property or services that the donor receives will be exempt from the GST/HST. The proposal will apply to property or services that are not already subject to the GST/HST and that are made after March 22, 2016.
Additional transitional relief is provided where a charity did not collect the GST/HST on the full value of donations made in exchange for property or services between December 21, 2001 (the date the ITA “split-receipting” rules came into effect) and March 22, 2016. If, during this period, the GST/HST was charged on only the value of the property or services received, consistent with the ITA “split-receipting” rules, or if the value of the property or services received was less than $500, the donors’ and charities’ GST/HST obligations will be satisfied and no further GST/HST will be owing.
2015 Federal Budget - Acquisition or Holding by Charities in Limited Partnerships
The 2015 Federal Budget proposed to permit charities to invest in limited partnerships, subject to certain restrictions. This would allow charities to diversify their investment portfolios to better support their charitable purposes and would give charities the flexibility to use more innovative approaches to address pressing social and economic needs in Canada. The 2016 Federal Budget confirms the Government’s intention to proceed with the tax measures relating to the acquisition or holding of limited partnership interests by registered charities, but notes that modifications might be made based on consultations held since the original announcement of this measure. We will need to wait and see whether any modifications will be made to this measure. It should also be noted that the CRA announced at the end of December 2015 that Canadian registered charities will now be required to report their limited partnership holdings in their T3010, Registered Charity Information Returns.
Commitment to Clarify the Rules Governing Political Activities
The 2016 Federal Budget confirms the CRA’s commitment, in consultation with the Department of Finance, to engage with charities, through discussions with stakeholder groups and an online consultation, to clarify the rules governing their political activities. This announcement is consistent with the mandate letter of November 2015 to the Minister of Finance to “work with the Minister of National Revenue to allow charities to do their work on behalf of Canadians free from political harassment, and modernize the rules governing the charitable and not-for-profit sectors”. This announcement also follows the completion of the CRA’s formal audit program, which targeted the political activities of charities.
While clarification of the rules remains to be seen, in the interim, charities should continue to be aware of and follow the current rules applicable to their engaging in political activities.
Charitable Donation Tax Credit Rate
In December 2015, the Federal Government announced that, effective for the 2016 and subsequent taxation years, there would be an increase in the personal income tax rate on individual taxable income in excess of $200,000 to 33%. To reflect this increase in the personal income tax rate, the 2016 Federal Budget proposes further amendments, one of which is to provide a 33% charitable donation tax credit on donations in excess of $200 to trusts that are subject to the 33% rate on all of their taxable income. The charitable donation tax credit measure will be limited to donations made after the 2015 taxation year. This measure will also extend the proposed 33% charitable donation tax credit to donations made by a graduated rate estate during a taxation year of the estate that straddles 2015 and 2016.