On February 11, 2014, then Finance Minister Jim Flaherty introduced the 2014 federal budget. While billed by some commentators as a non-event, the budget included a number of surprises for the charitable and not-for-profit sector, including certain restrictions on charitable activities as well as a few welcome tax incentives. Some of the more important proposals affecting the charitable and not-for-profit sector are summarized below.
Donations of ecologically-sensitive land
Currently, the Income Tax Act (ITA) provides enhanced tax incentives for donations of ecologically-sensitive land made to eligible conservation charities through Environment Canada’s ecological gifts program. The tax credit or deduction is currently limited to a five-year carry forward, which often results in some of the tax benefit related to ecological gifts not being fully used, particularly for lands under significant development pressure (where land values have appreciated significantly). Owners of such lands often do not have the income to offset the tax receipt over the five-year carry forward period.
The budget proposes the amendment of the definition of ‘total ecological gifts’ in subsection 118.1(1) of the ITA, to allow the charitable deduction or credit resulting from an ecological gift to be carried forward for 10 years. This amendment will apply to donations made as of 2014.
Estate donations
Currently, under the ITA, a gift made by an individual’s will is deemed to have been made by the individual immediately before he/she died. The donation tax credit for such gifts can be claimed in the individual’s terminal tax return or in the year immediately prior to death. However, the tax credit for a gift made by the estate of a deceased person can only be claimed by the estate.
The budget proposes that donations made by will and designation donations will be deemed to have been made by the estate at the time at which the property is transferred to a qualified donee. As such, these donations will no longer be deemed to have been made by the testator immediately before death. Through these amendments, estate trustees will be given more flexibility to allocate the donation made by will among:
Qualifying donations would have to be realized by a transfer to a qualified donee within the first 36 months after death. The estate may continue to claim a donation tax credit in respect of other donations in the year in which the donation is made, or in any of the five following years.
This provision will apply to donations made by will or designation donations for deaths that occur on or after January 1, 2016.
Donations of certified cultural property
Like ecological gifts, the ITA provides favourable income tax treatment for the disposition of certified cultural property to institutions and public authorities designated by the Minister of Canadian Heritage. This includes a tax exemption for capital gains realized on the disposition of cultural properties to those designated institutions and, when disposition is by way of a gift to those institutions, the provision of a tax credit or a deduction to donors of up to 100 per cent of their net income.
Continuing on the theme from last year’s budget of taking proactive measures to curtail the use of tax shelters, this year’s budget notes that donations of cultural property could be a target for abuse by tax shelters. As a result, it proposes to remove the exemption from the rule that deems the value of a gift to be no greater than its cost to the donor for certified cultural property acquired through a tax shelter arrangement.
This provision will apply to donations made on or after February 11, 2014.
New deregistration power—working against terrorism
Section 149.1 of the ITA will be amended to enable the Minister of National Revenue to refuse to register a charity or revoke its registration if it is determined to have accepted a gift from a foreign state as defined under the State Immunity Act. Currently, only Syria and Iran are listed as foreign states. This new power would be in addition to the Minister’s similar deregistration power under the Charities Registration (Security Information) Act.
The budget also contemplates that the Canada Revenue Agency (CRA) will “provide information about best practices” for exercising due diligence when “accepting gifts and for preventing terrorist abuse of the registration system for charities.” This should prove to be an important policy document, considering the increasing due diligence burdens that registered charities face.
Consultation on nonprofit organizations
Nonprofit organizations (NPOs) are entities that are exempt from income tax but are not charities. The budget outlines concerns that some organizations that claim NPO status earn profits that are essential to accomplish their nonprofit purposes and that the limited reporting requirements for NPOs do not allow the CRA or the public to properly assess their activities. It reveals the government’s intention to review whether the tax exemption for NPOs is appropriately targeted and whether there are “sufficient transparency and accountability provisions in place.” The government is expected to release a consultation paper on the matter.
Reducing the administrative burden on charities and other investments in the charitable sector
The budget proposes a number of amendments that aim to reduce the administrative burden on the charitable sector. This includes:
Terrance S. Carter is the managing partner with Carters Professional Corporation, and counsel to Fasken Martineau DuMoulin LLP on charitable matters. He is a member of Canada Revenue Agency’s Technical Issues Group, past member of CRA’s Charities Advisory Committee, Chair of the National Charity and Not-for-Profit Section of the Canadian Bar Association, and has been recognized as a leading expert in Canada by Lexpert and Best Lawyers in Canada. He can be reached at tcarter@carters.ca.
Ryan is a regular speaker and author on the topic of directors’ and officers’ liability for not-for-profit corporations, and has co-authored papers for Law Society of Upper Canada. In addition, Ryan has contributed to several Charity Law Bulletins and other publications on www.charitylaw.ca, and is a regular presenter at the annual Church and Charity Law seminar. Contact him rprendergast@carters.ca.
