A.
Introduction
Planned
giving professionals should
be aware of numerous
legislative, regulatory and
common law developments in
2004 that will significantly
impact how charities operate
in Canada and abroad. The
following brief summary
outlines the more important
developments in this regard,
including the new definition
of gift for tax purposes,
the new definition of
charitable organization and
public foundation, and the
new regulatory regime under
the Income Tax Act
(the “ITA”).
B.
TAX
ISSUES
1.
February 27, 2004 Income Tax
Amendments
Draft amendments to the
ITA, released on
February 27, 2004,
constitute a
consolidation of, and
further amendment to,
previously proposed
amendments introduced on
December 20, 2002 and
December 5, 2003
(collectively referred
to as the “February 2004
Amendments”),
and has not been passed
by Parliament as of
March 1, 2005.
a)
New
Definitions
At common law, a “gift”
must be transferred
voluntarily, without any
contractual obligation
or advantage of a
material nature returned
to the donor. A new
concept of “gift” will
be introduced to provide
a tax benefit, where the
value of the gifted
property made after
December 20, 2002
exceeds the advantage
received.
The current
“contribution” test
requiring that
a
charitable organization
or public foundation
receive not more
than 50% of the capital
contributed from one
donor, will be replaced
with a new “control”
test, retroactive to
January 1, 2000.
This will permit a
charity to receive
contributions of more
than 50% of its capital
from a person or a group
of persons, provided
that the donor(s) does
not control the charity
or represent more than
50% of the directors and
trustees of the
charity,.
b)
New Donation Deeming
Provision
Changes to shut down
“buy-low, donate-high”
donation schemes
providing donors with
elevated tax benefits
will be introduced as a
result of concerns
raised by the public and
Canada Revenue Agency (“CRA”).
The ITA will be amended
to provide that if a
taxpayer acquires
property through a
“gifting arrangement” as
defined in the ITA, then
the fair market value (“FMV”)
of the property donated,
regardless of when the
property was acquired,
shall be “deemed” to be
the lesser of (i) the
FMV of the property and
(ii) the cost of the
property to the taxpayer
immediately before the
gift is made (the
“Deeming Provision”),
and will apply to gifts
made on or after 6 p.m.,
December 5, 2003. The
Deeming Provision will
not apply to inventory,
real property situated
in Canada, certified
cultural property,
publicly traded shares
or ecological gifts.
The Deeming Provision
will also apply (1) if a
donor acquires property
and donates the property
within three years of
the date of acquisition,
and (2) if it is
“reasonable to conclude”
that the donor intended
to make a gift when the
property was acquired,
regardless of when the
donor acquired the
property, but will not
apply to situations
where a gift is made as
a consequence of the
donor’s death. The
burden of proof is on
the donor to show that
there was no intention
to make a gift when the
property was acquired.
These amendments apply
to gifts made on or
after 6 p.m. on December
5, 2003, and will have
serious practical
implications on how
charities accept gifts
and issue donation
receipts, including
possibly requiring
donors to provide
written confirmation of
when donated property
was acquired.
c)
Restricting the Use of
Limited Recourse Debt
Provisions will be
introduced to curtail
gifting arrangements
involving
limited-recourse debts
incurred by donors by
reducing the amount of
the gift by the amount
of the loan if the
indebtedness is of
limited recourse to the
lender or if there is a
guarantee, security or
similar indemnity or
covenant with respect to
that debt or any other
debts. These amendments
will apply to donations
made after February 18,
2003.
d)
Substantive Gift
A new subsection will be
included that applies to
gifts of capital
property and eligible
capital property
(“substantive gifts”)
made on or after
February 27, 2004, to
prevent donors from
avoiding application of
the Deeming Provision by
disposing of property to
a qualified donee and
then donating the
proceeds of disposition
to either that qualified
donee or to another
qualified donee who does
not deal at arm’s length
with the qualified donee
that purchased the
property, rather than
donating the property
directly to the
qualified donee. Under
these situations, the
FMV of the substantive
gift or the proceeds of
sale would be “deemed”
to be the lesser of the
FMV of the property sold
and the cost of the
property to the taxpayer
immediately before the
sale of the property.
e)
New qualified donee
The list of “qualified
donees” will be expanded
to include municipal or
public bodies performing
a function of government
in Canada.
2.
December 6, 2004 Income Tax
Amendments
Draft income tax
amendments implementing
the 2004 Federal Budget
were released on
September 16, 2004, and
further amended and
consolidated by a
Notice of Ways and Means
Motion tabled on
December 6, 2004 (the
“December 2004
Amendments”). The
resulting Bill C-33
was passed by
Parliament on February
25, 2005. These
amendments, summarized
below, generally apply
to taxation years
beginning after March
22, 2004, with some
exceptions being in
effect 30 days after
Bill C-33 receives Royal
Assent, and do not
affect the changes
embodied in the February
2004 Amendments.
a)
New intermediate
sanctions
Intermediate sanctions
will be introduced to
provide an alternative
to revocation of
charitable status for
minor or unintended
infractions, including
taxation of gross
revenue derived from
business activities,
suspension of
tax-receipting
privileges, monetary
penalties, and taxation
of gifts and transfers
to other registered
charities. Some
sanctions are
progressive, increasing
in severity for repeat
infractions within a 5
year-period.
b)
Annulment and revocation
The Minister will now
have explicit authority
to annul an
organization’s
registration if it was
registered in error or
if it has ceased to be a
charity “solely as a
result of a change in
law.” Annulled
organizations will be
deemed not to have been
registered at all and
the Part V revocation
tax will not apply, but
official receipts issued
prior to annulment will
be accepted as valid.
The Minister also
retains the right to
revoke the registration
of a charity in the
event of severe breaches
of the ITA. These
amendments also require
the assets of a charity
whose registration has
been revoked to be
transferred to an
“eligible donee,” rather
than a qualified donee.
c)
Appeals
The appeal process will
be more accessible and
affordable for
registered charities and
unsuccessful applicants
for charitable status.
CRA’s internal review
process will be extended
to notices of a decision
by the Minister
regarding the revocation
or annulment of a
charity’s registration,
designation of a charity
as a private or public
foundation or charitable
organization, denial of
applications for
charitable status, and
imposition of taxes or
penalties against a
registered charity.
Appeals of decisions
concerning refusals to
grant registered
charitable status and
revocation of registered
charitable status will
continue to be made to
the Federal Court of
Appeal, while taxes and
penalties will be
appealed to the Tax
Court of Canada.
d)
Transparency and
accessibility of
information
The Minister will have
the authority to release
additional information
to the public, including
grounds for revocation
or annulment; financial
statements; decisions of
CRA regarding notices of
objection;
identification of
registered charities
subject to sanctions,
the type of sanction
imposed, and grounds for
the sanction;
information to support
an application by a
registered charity for
special status or an
exemption under the ITA;
and reasons for denying
the registration of
organizations. Further,
official donation
receipts issued after
2004 will be required to
include the current
internet address of CRA.
e)
New disbursement quota
rules
The 4.5% disbursement
quota will be reduced to
a more manageable rate
of 3.5% for taxation
years beginning after
March 22, 2004. The
3.5% disbursement quota,
previously only
applicable to public and
private foundations,
will also apply to
charitable
organizations, if the
value of their
investment assets
exceeds $25,000.
In addition, a new
concept of “enduring
property” was
introduced, which
includes gifts received
by way of a bequest or
inheritance (including
gifts of life insurance
proceeds, RRIFs and
RRSPs as a result of
direct beneficiary
designation), ten-year
gifts, and gifts
received by a charity as
the transferee of an
enduring property. In
general, a charity will
be permitted to encroach
on the capital gains of
enduring property up to
a maximum of the lesser
of 3.5% of the charity’s
investment assets and
its “capital gains
pool,” which is the
realized capital gain
from the disposition of
enduring property
declared by the charity
on its T3010 Information
Return.
Finally, transfers from
registered charities to
charitable
organizations,
previously exempt from
the 80% disbursement
quota, will be subject
to the 80% disbursement
requirement, except
those involving
specified gifts and
enduring property.
While many aspects of
the proposed new
disbursement quota rules
reflect an attempt by
the Department of
Finance to address a
number of difficulties
facing charities, the
complexities introduced
are such as to make them
more difficult, if not
impossible, for the
average charity to
understand, let alone
comply with. In
addition, there are
concerns that the
proposed amendments
represent a major change
in tax policy that will
blur the line between
public foundations and
charitable
organizations.
C.
OTHER INITIATIVES AFFECTING
CHARITIES
The decision in
Brantford General
Hospital Foundation v.
Marquis Estate
reinforced
the long standing common
law principle that a
pledge is unenforceable
for lack of
consideration.
The conclusions that can
be drawn from this
decision are, (1) when
drafting a will, it is
important to ensure that
the testamentary gift
will continue to honour
the inter vivos
gift and allow for the
testator’s wishes to be
fulfilled, (2) a pledge
is not a binding
contract, as a pledge
must be accompanied by
consideration to be
enforceable, and (3) the
doctrines of part
performance and estoppel
only allow enforcement
of a pledge in cases
where there is a
pre-existing legal or
contractual relationship
between the parties.
In September 2004, the
CRA released “Charities
in the International
Context,” which provides
operational guidance to
Canadian charities
operating abroad, with
the stated rationale, in
part, of ensuring that
the tax benefits
reserved for Canadian
charities are not used
to provide support to
terrorism in the guise
of charity. It affirms
that charities continue
to fall under the
jurisdiction of Canadian
statutory and regulatory
authorities and
identifies resources
that address the
boundaries within which
charitable activities
must be carried out.
British Columbia
introduced the
Charitable Purposes
Preservation Act in
response to the
decisions in the
Christian Brothers of
Ireland in Canada cases,
in
which the courts found
that property held in
special purpose
charitable trusts can be
seized by a creditor to
satisfy debts owed to
tort claimants, even if
those claims arise from
circumstances unrelated
to the trust in
question. This Act
addressed this concern
by supplementing the law
of trusts, as it relates
to charitable giving, by
expressly recognizing
and protecting discrete
purpose gifts and
setting out the
obligations such gifts
impose on recipient
charities and the
courts.
In
April 2004, the Uniform
Law Conference of
Canada, Civil Law
Section, (ULCC) released
a position paper on
“Charitable
Fundraising.” The
resulting draft
Uniform Charitable
Fundraising Act,
expected by August 2005,
is anticipated to affect
charities across Canada
by addressing instances
of fraudulent, inept and
unethical fundraising
practices by charities
and fundraising
businesses, which
undermine the integrity
of the sector.
About Terrance S. Carter,
B.A., LL.B.
Terrance Carter practices
primarily in the area of
charity and not-for-profit
law, with an emphasis on
fund raising, gift planning,
religious organizations and
international strategic
planning. Mr. Carter is a
member of Canada Revenue
Agency's (CRA) Charity
Advisory Committee, and is
recognized as one of the
leading experts in the area
of charity and
not-for-profit law in Canada
by Lexpert.
Mr. Carter is a member of
the Technical Issues
Committee of CRA's Charities
Directorate representing the
CBA, is Past Chair of the
Charity and Not for Profit
Law Sections of both the
Canadian Bar Association (CBA)
and Ontario Bar Association
(OBA), and a member of the
Government Relations
Committee of the Canadian
Association of Gift Planners
(CAGP). He is also a member
of the Association of
Fundraising Professionals,
the International Center for
Not-for-Profit Law in
Washington, D.C., and the
American Bar Association Tax
Exempt Section, has
participated in
consultations with the
Public Guardian and Trustee
of Ontario and the Charities
Directorate of CRA, and was
a member of the Bill C-36
Anti-terrorism Committee of
the CBA in its submission to
Parliament.
Mr. Carter has written
numerous articles and has
been a frequent speaker on
legal issues involving
charities and not-for-profit
organizations for numerous
groups across Canada, as
well as internationally,
including the Law Society of
Upper Canada, the CBA, the
OBA, the Association of Fund
Raising Professionals, the
American Bar Association,
the CAGP, the Canadian Tax
Foundation and The Institute
of Chartered Accountants.
About Theresa L. M. Man,
B.Sc., M.Mus., LL.B.
Theresa L.M. Man joined
Carter & Associates in 2001
to practice in the areas of
charity and not-for-profit
law, corporate and
commercial law and real
estate, after having
practiced at a law firm in
Toronto and having been a
sole practitioner in Markham
for four years. Ms. Man has
been actively involved with
numerous charities, either
as a legal advisor or as a
member of the Board of
Directors. She has been
involved in various seminars
and is an invited speaker at
a seminar regarding
not-for-profit organizations
hosted by the Canadian Bar
Association. Ms. Man has
also written on a number of
legal topics for
www.charitylaw.ca, including
the 2004 Federal Budget and
amendments to the Income
Tax Act.
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