Registered charities have traditionally been unable to invest in
limited partnership units without jeopardizing their tax-exempt
status. This year, the federal government proposed changes to the
Income Tax Act to allow charities to invest in limited
partnerships but there are rules and restrictions that must be
understood before such an investment is made.
Subject to various rules and limitations in the Income Tax
Act, registered charities are able to invest in corporations
by acquiring and owning shares or other securities. Many business
ventures that attract charities as potential investors are
structured as partnerships. These investment opportunities have
traditionally been offside for registered charities because of the
legal meaning of partnership.
At law, a partnership is a relationship between two or more
parties that carry on business in common with a view to generating
profit. This definition poses a problem for registered
charities because every partner in a partnership is deemed to be
carrying on the business of the partnership. This means that if a
charity is a partner, it is deemed to carry on business.
To date this has been a problem because registered charities can
only carry on business activities in limited circumstances.
Private foundations cannot carry on any business activities at
all. Charitable organizations and public foundations can only
carry on business activities that are "related" to their
charitable purposes. If the business activity is not so
related, the charity's registration is at risk. Most businesses
conducted by partnerships are unlikely to be related to a
In the 2015 federal budget, the government announced that it
would amend the Income Tax Act to allow registered
charities (and registered Canadian amateur athletic associations
("RCAAAs") to invest in limited partnerships in certain
circumstances. The draft legislation to implement these changes was
released on July 31, 2015.
Section 253.1 now provides that a registered charity or RCAAA
that holds an interest as a member of a partnership will not, for
that reason alone, be considered to carry on the business of the
partnership provided certain conditions are met, specifically:
the partnership must be a limited partnership and the charity
must be a limited partner in the partnership.
the charity must be at arm's length with each general
partner of the partnership.
the charity, in combination with any other parties that are not
arm's length to the charity, must not collectively hold
interests with a fair market value of more than 20% of the total
fair market value of all interests of the partnership.
The first two conditions should not create an issue in most
cases. The third condition will require careful consideration
at the time of the investment and ongoing due diligence. It is
hoped that the Canada Revenue Agency will provide guidance as to
how the 20% interest will be measured. At the time an investment is
made, a charity should be able to determine that the 20% test has
been met having regard to the limited partnership units that are
outstanding. As currently drafted, however, the 20% test must
be met at all times.
An investment in a widely-held publicly-traded limited
partnership should not be problematic. If the investment is
in a limited partnership where the units are not widely held,
charities will need to proceed cautiously before the investment is
made. The limited partnership agreement will need to be
reviewed for circumstances when there can be a redemption of
units. A redemption by a third party could result in a change
in the charity's percentage interest in the partnership. In
addition, consideration will need to be given to the charity's
ability to have its units redeemed if continued investment in the
limited partnership could result in a revocation of its status as a
The draft changes are deemed to have come into force on April
21, 2015. As such, registered charities should be allowed to
invest in limited partnership units now. The draft changes
will not be enacted until the House of Commons convenes after the
federal election in October. It is possible that there may be
changes to the proposed amendments before they are enacted.
The ability of registered charities to hold limited partnership
interests is a positive development for the charitable sector,
creating new possibilities for investment and for social
enterprise. Like all rules for charities, however, the devil is in
the details and charities will need to ensure they fully understand
the restrictions and obligations they take on in investing in
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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