March 22, 2016, was Federal Budget day. The Budget contains relatively few tax measures specific to charities and non-profit organizations. Unfortunately, the most significant measure – the reversal of the previously-proposed capital gains exemption on the donation of proceeds of the sale of real estate and private company shares – will come as a disappointment to some in the sector. Aside from a relieving measure related to GST/HST on charitable donations and a few technical measures, the Budget contains no new donation incentives. Charities and not-for-profits will be pleased that the Budget does not impose additional compliance burdens on the sector.
Previously Announced Measures in Budget 2015
No Capital Gains Exemption for Donations of Real Estate and Shares of Private Corporations
Budget 2016 announces the Government's intention to reverse proposals made in Budget 2015 with respect to donations of the cash proceeds from sales of real estate and private company shares. Budget 2015 proposed to exempt from tax capital gains incurred on the sale of real estate and private company shares to the extent the cash proceeds from the sale of such property were donated to a registered charity within 30 days of the sale. These changes were to take effect starting in 2017 and draft legislation implementing these changes had been released. We reported on these measures in past issues of this Newsletter. Budget 2016 confirms that the Government does not intend to go forward with these changes.
This announcement will come as a disappointment to some in the charitable sector, which had lobbied for relief from capital gains in respect of donations of real estate and private company shares. Others – for example, charities specifically eligible to receive gifts of ecological property – may not be disappointed by this measure.
The Budget does not affect the tax credits or deductions normally available for in-kind gifts of real estate or private company shares. Gifts of publicly-listed securities are also not affected by the Budget announcement, and will continue to be exempt from tax on capital gains.
Investments by Charities in Limited Partnerships Permitted
The Budget confirms the Government's intention to "proceed with tax and related measures, as modified, to take into account consultations and deliberations since their announcement or release, relating to ... the acquisition or holding of limited partnership interests by registered charities." As reported previously in this Newsletter, Budget 2015 introduced relieving provisions allowing direct investment in limited partnerships by registered charities provided certain conditions are met. It appears that the Government will preserve this change.
Split-Receipting Treatment of GST/HST on Charitable Donations
The Budget proposes a new relieving measure related to the application of the sales tax regime (whether GST or HST depending on the province) to charitable donations. The measure will effectively apply the split-receipting regime that applies to charitable gifts for income tax purposes to the GST/HST regime.
Currently, where a donor makes a gift to a registered charity, the gift is not subject to GST/HST provided that the donor does not receive anything in return for the gift. If, however, the donor receives property or services (referred to as a "supply") from the charity in exchange for a donation, the full value of the donation is generally (subject to various exemptions) subject to GST/HST even if the value of the property or services received is less than the value of the gift. It appears that some charities may not have understood that GST/HST was to apply in this circumstance.
The Budget proposes to revise the GST/HST rules to align them with the split-receipting rules in the Income Tax Act. Under the split-receipting rules, where a donor makes a gift to a registered charity and receives some property or service in return (referred to as an "advantage") an official donation receipt may be issued for the value of the gifted property less the amount of the advantage. This net gift amount is referred to as the "eligible amount of the gift". Budget 2016 proposes that where such a gift is made, and provided that an official donation receipt can be issued for an eligible amount of the gift, GST/HST will only apply to the value of the supply received by the donor (assuming the property or service is not otherwise exempt from GST/HST). The portion of the donation in excess of the supply will no longer be subject to GST/HST.
The Budget confirmed that this new measure will apply to supplies made after March 22, 2016.
There is also a transition provision addressing the application of these new rules to GST/HST which may not have been collected between December 21, 2002 (when the income tax split-receipting rules came into effect) and Budget Day. Rather than being subject to assessment for GST/HST on the full amount of any donations made in this period, the Budget provides that any such assessment will be calculated as follows:
- if the value of the supply was less than $500, GST/HST will be considered as paid;
- if GST/HST was only collected on the value of the supply, no further GST/HST will be assessed; and
- in other cases, the charity will be required to remit GST/HST on the value of the supply only (i.e., in other words, the new relieving split-receipting rules will apply to determine the amount assessed).
Commitment to Review and Clarify Political Activity Rules
In his November 2015 Mandate Letter to the Minister of National Revenue, Diane Lebouthillier, Prime Minister Trudeau mandated her to work to "modernize" Canada's charity law and clarify the rules in the Income Tax Act that deal with political activities. Budget 2016 confirms the Government's commitment to take on the task of clarifying the political activity rules. More specifically, the Budget announced that the "Canada Revenue Agency, in consultation with the Department of Finance, will engage with charities through discussions with stakeholder groups and an online consultation to clarify the rules governing the political activities of charities." No further information was provided in the Budget about the process.
The November 2015 Mandate Letter also stated that the Minister should "allow charities to do their work on behalf of Canadians free from political harassment ... with an understanding that charities make an important contribution to public debate and public policy." Leading up to this announcement, the Canada Revenue Agency had been carrying out a formal audit program, the focus of which was to look at charities' political activities. No comments on the audit program were made in the Budget.
The budget is arguably consistent with the Government's commitment to allow charities to work free from political harassment. The specifics of any clarification or revision to the rules around political activities of course remain to be seen. Charities should watch for public consultations on this topic. We will continue to follow developments in this area and will report on them in our Newsletter.
Charitable Donation Tax Credit Rate for Estate Donations
In December 2015, the Federal Government announced that it would increase the personal income tax rate for top earners in Canada, with corresponding changes to the charitable donation tax credit rates to introduce a top donation tax credit rate of 33%. We previously reported on this change in our Newsletter.
The Budget proposes technical changes to ensure that this increased charitable donation tax credit rate applies to all taxpayers with income that is subject to the new 33% rate, including trusts and graduated rate estates. These changes appear designed to ensure that the 33% donation tax credit rate applies to all income of these taxpayers that is taxed at the highest marginal rate. Trusts that are subject to the 33% rate on all of their taxable income will receive a donation tax credit of 33% on all donations above $200 made after the 2015 taxation year. The measure will also extend the proposed 33% charitable donation tax credit to be available for donations made by a graduated rate estate during a taxation year of the estate that straddles 2015 and 2016.
Investments in Charitable Sector
While the Budget contains relatively few tax measures specific to the charitable or non-profit sector, it does announce several initiatives and investments that will be of interest to certain organizations within the sector including:
- an investment of $339 million over three years to create up to 35,000 additional youth jobs in the non-profit sector in each of the next three years. This program provides funding to not-for-profit organizations with 50 or fewer employees to create summer job opportunities for individuals aged 15 to 30 years who are full-time students and intend to return to their studies in the next school year;
- $39 million in funding over three years to the Canadian Foundation for Healthcare Improvement to support its ongoing efforts to identify and introduce innovations in the health care system;
- up to $20 million in funding over three years for the Brain Canada Foundation's Canada Brain Research Fund;
- $50 million in funding over two years to Canada Health Infoway to support short-term digital health initiatives;
- an investment of $168.2 million over two years in the Canada Cultural Spaces Fund to support the renovation and construction of arts and heritage facilities. Recipients would include not-for-profit arts and heritage organizations, provincial and territorial governments, municipalities and their agencies, and equivalent Indigenous peoples' institutions;
- $14 million in funding over two years to the Mitacs Globalink program to support 825 internships and fellowships in support of Canadian universities;
- $237.2 million in funding in 2016-17 to Genome Canada to support continued research in genomics; and
- $50 million in funding over 5 years for the National Optics Institute to support the Institute's work with businesses in Quebec in the areas of optics and photonics.
Expanding Open Data Initiatives
As part of the pre-Budget consultation process, Imagine Canada made a submission to the House of Commons Standing Committee on Finance which included a recommendation that the Government should establish a partnership with the charitable and non-profit sector to identify gaps in data being collected by the federal government and ways to address barriers to charities and non-profits being able to access data held by the Government.
Although the Budget did not specifically mention the need for open data involving the charitable sector, the Budget contains a statement to the effect that the Government will seek to be more open and expedient in delivering information to Canadians by accelerating and expanding open data initiatives. More specifically, the Budget proposes to provide $11.5 million over five years to double the budget for open government activities. It was stated that this funding will lead to enhancements in the Government's capacity to support engagement with Canadians, to design and deliver an open government strategy, and to accelerate the provision of digital content.
Government Announces Unprecedented Investment in Canada's Indigenous Peoples
The Budget proposed to invest an impressive $8.4 billion over five years to improve the socio-economic conditions of Canada's Indigenous peoples. With a view to providing a better quality of life for Indigenous peoples and ensuring that their voices are heard, the Government's proposed areas of investment include, but are not limited to:
- education, early learning and child care;
- health, safety and well-being of children and those living on reserves;
- skills training and employment;
- inclusive social infrastructure;
- safe shelter for victims of violence;
- cultural, recreational, and community infrastructure;
- environment on reserves, including proper waste management;
- assistance to Indigenous peoples facing the criminal justice system;
- Aboriginal languages; and
- support for First Nations finance authority and fishing enterprises
To achieve its goals in each of the foregoing areas, the Government has committed to working with First Nations, Métis, and Inuit groups in Canada in ways designed to benefit both Indigenous peoples and all Canadians.
Many organizations, including Canadian charities and not-for-profit organizations established to assist Canada's Indigenous peoples, will likely benefit greatly from the Government's funding commitments toward such a fundamental part of Canada's historical and cultural fabric.
Those who are interested in reading about other sections of the Budget may wish to consult Miller Thomson's general Budget Release.
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.