Charities and Not-for-Profit Measures
The Budget includes a number of welcome proposals for donors and charities.
Capital Gains Exemption Extended to Gifts of Private Shares and Real Estate
Over the past decade, the Federal Government has expanded the capital gains exemption available when certain types of property, particularly gifts of appreciated listed securities, are donated. This year, the Budget proposes to exempt from capital gains tax charitable gifts of the proceeds of disposition of private company shares and real estate.
Donations of capital property to a registered charity (and certain other entities), are generally eligible for donation tax credits or deductions. However, unless an exemption applies, a donor is subject to tax on donations of capital property on any capital gains realized as a result of the transfer. This tax may be sheltered by the tax credits or deductions arising from the gift, but will reduce the overall tax benefit to the donor.
Beginning in 2017, the Budget proposes that the exemption from capital gains tax will be extended to gifts of the proceeds of disposition of private company shares or real estate. This capital gains tax exemption will apply differently than the current exemption for gifts of publicly listed securities, where the capital gains exemption applies to direct gifts of these securities to a qualified donee. If the donor were to sell the securities and donate the cash proceeds, the capital gains exemption would not apply. It appears that the opposite will be true for gifts of private company shares and real estate. The Budget states that the capital gains exemption will be available where:
- cash proceeds from the disposition of the private corporation shares or real estate are donated to a qualified donee within 30 days after the disposition; and
- the private corporation shares or real estate are sold to a purchaser that is dealing at arm's length with both the donor and the qualified donee to which the proceeds are donated.
The Budget proposals include new anti-avoidance rules with respect to this exemption, which will reverse the benefit of the exemption. These anti-avoidance provisions will apply where any of the following occur 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.
Budget Enables Investment in Limited Partnerships by Registered Charities
Currently, registered charities are not permitted to invest in limited partnerships. This is due to the way the law of partnerships attributes the business activities of the partnership to each limited partner (each partner is deemed to carry on the business of the partnership), and the fact that charities are limited with respect to carrying on a business (or, in the case of a private foundation, completely precluded).
The Budget proposes to amend the 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. Beginning on Budget Day, registered charities will be permitted to invest in limited partnerships as long as the following conditions are met:
- the charity – together with all non-arm's length entities – holds 20% 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.
The Budget also confirms that these measures will apply to registered Canadian amateur athletic associations.
Amendments to Gifts to Foreign Charitable Foundations
Under current rules, a foreign charitable organization that has received a gift from the federal Crown in the previous 24 months can apply for status as a "qualified donee." If the status is granted, a Canadian taxpayer who donates to such entities would be eligible for a tax credit (or deduction). A foreign charitable organization is eligible to apply for qualified donee status if it is carrying on disaster relief work, urgent humanitarian aid, or other work in the national interest of Canada. Qualified donee status is granted in the discretion of the Minister of National Revenue in consultation with the Minister of Finance for a 24-month period, and the organization is included on a list of registered foreign charities maintained on the CRA's website. Under the proposed rules, a foreign charitable foundation will also be able to apply for qualified donee status if it meets the same criteria.
The Budget confirms that this measure will apply upon Royal Assent to the enacting legislation.
For those who interested a more detailed analysis of the Charities and Not-for-Profit sections of the Budget, please consult Miller Thomson's Charities and Not-for-Profit Newsletter: Special Budget Edition.
Aboriginal Tax Policy
In the Budget, the Federal Government reiterated its support for initiatives that encourage the exercise of direct taxation powers by Aboriginal governments.
The Federal Government noted that, to date, it has entered into 35 sales tax arrangements under which Indian Act bands and self-governing Aboriginal groups levy a sales tax within their reserves or their settlement lands. In addition, 14 arrangements respecting personal income taxes are in effect with self-governing Aboriginal groups under which they impose a personal income tax on all residents within their settlement lands.
The Federal Government reiterated its willingness to discuss and put into effect direct taxation arrangements with interested Aboriginal Federal Governments. The Federal Government also reiterated its support of direct taxation arrangements between interested provinces or territories and Aboriginal governments, and noted that it has enacted legislation to facilitate such arrangements.
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