Canada: Social Impact Newsletter – Special Budget Edition


The Federal Government of Canada tabled its 2017 Budget on March 22nd. The Budget was relatively thin compared to the last federal budget and did not contain significant tax changes across any sectors. Specifically, despite the rumours that have persisted since the lead-up to Budget 2016, this year the Federal Government did not change the capital gains inclusion rate from its current rate of 50%.

The Budget contained a few small changes that will affect charities when they come into effect. The proposed changes primarily include new rules added to the existing ecological gifts regime, and the repeal of an additional deduction that corporations were entitled to claim for gifts of medicine used to support charities' activities overseas.

Those who are interested in reading about other sections of the Budget may wish to consult Miller Thomson's general Budget Release.

More Substantive Regime for Gifts of Ecologically Sensitive Land

In an effort to preserve Canada's environmental heritage and encourage donations of ecologically sensitive land (and related easements, covenants and servitudes on such land) ("ESL") while avoiding conflicts of interest, the Budget limits the donation regime for gifts of ESL.

Under the existing regime for gifts of ESL, donors of ESL are exempt from capital gains tax on the gift and entitled to claim a tax credit (individuals) or a tax deduction (corporations) for the eligible amount of the gift, up to 100% of their income. These tax benefits may be carried forward for a period of 10 years. In order to obtain these tax benefits, however, the ESL must be certified by the Minister of Environment and Climate Change Canada ("ECCC") as land that is "ecologically sensitive" and is thereby important to conserve and protect as part of Canada's environmental heritage. The Minister of ECCC must also approve transfers of ESL to charities and certify the fair market value ("FMV") of the land.

Budget 2017 contains three proposals to amend the existing regime: (1) imposition of a new tax in certain situations where ESL is transferred between organizations; (2) prohibition on the receipt of gifts of ESL by private foundations; and (3) new measures to encourage more gifts of ESL in Québec.

It is proposed that each of these measures will apply to gifts of ESL that occur on or after March 22, 2017 ("Budget Day").

(a) New Measures to Protect Future Use

Under the Tax Act, where a charity, municipality in Canada or municipal or public body performing a function of government in Canada (the "Donee") receives a gift of ESL and, without consent from the Minister of ECCC, either: (i) disposes of the ESL; or (ii) changes the use of the ESL, the Donee is subject to a tax equal to 50% of the FMV of the ESL. The measures proposed in the Budget extend the 50% tax beyond situations where a Donee receives a donation of ESL to situations where a Donee subsequently sells the ESL to a third-party. Specifically, the Budget proposes that a tax equal to 50% of the FMV of the ESL will be imposed upon a purchaser of ESL where the purchaser, without consent from the Minister of ECCC, either: (i) disposes of the ESL; or (ii) changes the use of the ESL.

CRA will be responsible for assessing and collecting the applicable tax.

Under the new rules, the Minister of ECCC's ability to determine whether proposed changes to the use of land would degrade conservation protections will be clarified.

Additionally, the Budget proposes to amend the approval process for certain recipients of ESL. Currently, where the recipient is a registered charity, the Minister of ECCC must approve the charity as an eligible recipient of ESL on a gift-by-gift basis. However, municipalities and municipal and public bodies performing a function of government are automatically eligible to receive gifts of ESL. The Budget thus proposes to eliminate the automatic approval of municipalities and municipal and public bodies performing a function of government as eligible recipients of ESL and subject these entities to approval on a gift-by-gift basis.

As indicated in the Budget, this measure is intended "to ensure that recipients of 'ecogifts' are focused on the long-term protection of ecologically sensitive land."

(b) Private Foundations Excluded from Gift Regime

Budget 2017 proposes to prohibit private foundation from receiving gifts of ESL. As the Budget explains, the ability of private foundations to receive such gifts gives rise to potential conflicts of interest. The Budget gives the following example of a conflict of interest involving a gift of ESL:

"[W]here a director of a private foundation donates an easement in respect of a property to the private foundation, the individuals responsible for enforcing the private foundation's rights under the easement would often be the same persons as those against whom the rights must be enforced."

(c) Gifts of ESL in Québec

Servitudes are the subjection of real property to an easement. Pursuant to Québec civil law, both real and personal servitudes can exist. A real servitude exists where a charge on land grants the rights of dominant property over the rights of servient property. A personal servitude exists where a charge on land grants rights in property to a particular person. Under the current ESL regime, only real servitudes may be donated, since personal servitudes cannot run in perpetuity. Since the conditions for real servitude can be difficult to meet, Budget 2017 proposes to amend the Tax Act to allow donations of personal servitudes to qualify as gifts of ESL. Qualifying donations will be required to meet a number of conditions, including a requirement that the personal servitude run for at least 100 years.

Repeal of Additional Deduction for Gifts of Medicine

The Budget proposes to repeal a measure introduced in 2007 to encourage corporate donations of medicine out of inventory.

Prior to Budget Day, corporations that made "eligible medical gifts" to registered charities were entitled an additional special deduction over and above to the normal deduction available for gifts in kind. The amount of the additional deduction is equal to the lesser of the following amounts: (i) the cost of the donated medicine; and (ii) 50% of the amount by which the fair market value of the donated medicine exceeds its cost.

An "eligible medical gift" is defined essentially as a gift of medicine (specifically medicine that qualifies as a "drug" within the meaning of the Food and Drug Regulations and that will not expire for at least 6 months), from the corporation's inventory to registered charities for use in the charities' activities carried on outside of Canada.

The Budget proposes that this special incentive will no longer be available for gifts made on or after Budget Day.

This proposed change does not affect the general ability of corporations to deduct the eligible amount of donations of property – including medicine – to registered charities. The Budget only proposes to eliminate the ability of corporations to claim the special additional deduction.

Charities that operate medical clinics for people in need overseas, or that provide assistance to people in disaster and conflict zones, will be disappointed to hear that corporations may be less incentivized to donate medical inventory. The Budget states that the measure is being repealed due primarily to low take-up. As with the expiry of the first-time donor super credit, it is questionable whether low take-up alone justifies the repeal of a measure that incentivizes, even for a small group of donors, gifts that provide life-saving aid to the poor in the developing world. However, we have seen little use of this provision in practice and its repeal is unlikely to hinder relief and development charities carrying on work overseas.

New National Housing Strategy

The Budget proposes a number of affordable housing initiatives with a combined investment of $11.2 billion over an 11-year period as part of a new National Housing Strategy. The proposed investment represents a significant increase over Budget 2016's commitment of $2.2 billion over a 2-year period. Significantly, the Budget proposes to create a new National Housing Fund (the "Fund") to address critical housing issues and provide housing-related support for certain vulnerable citizens. The Fund will be capitalized with an investment of $5 billion over the next 11 years.

The vulnerable citizens specifically mentioned in the Budget include seniors, Indigenous Peoples, survivors fleeing situations of domestic violence, persons with disabilities, people dealing with mental health and addiction issues, and veterans.

The Budget identifies a number of priorities on which the Fund will focus. Specifically, the Fund will:

  • encourage greater collaboration and investment in housing;
  • expand direct lending for new rental housing supply and renewal;
  • support for innovations in affordable housing;
  • preserve the affordability of social housing; and
  • support a strong and sustainable social housing sector.

The Fund will be administered through the Canada Mortgage and Housing Corporation ("CMHC"). Further details about the Fund will be announced later in 2017.

The Fund's priority of encouraging greater collaboration in the housing sector specifically includes looking for opportunities to pool resources from many partners to fund projects, with a focus on large-scale community projects. Other priorities include the support of innovations designed to improve the quality of life for residents and new tools to assist social housing providers to transition to more efficient and financially sustainable operating models. As a result of these priorities, the creation of the Fund is exciting news for charities and non-profits. It is also stirring for social enterprises and investors that are exploring social finance and other impact models.

It should be noted that the Federal Government has indicated that, in addition to the funding of the new National Housing Strategy, it will initially preserve baseline funding obligations that arise from existing operating agreements that help subsidize affordable rental housing. However, since many of these agreements are expiring as CMHC mortgages wind-down, the Federal Government will be evaluating the use and renewal of these agreements over the next year.

Electronic Distribution of T4 Information Slips

Currently, issuers of T4 information slips must provide two copies of the slips to each employee or worker to whom they relate. These slips must be delivered to the taxpayer or sent to the taxpayer's last known address. Copies of T4 slips may only be sent to a taxpayer electronically if the taxpayer has provided advance written or electronic consent to receive the slips in that manner.

The Budget seeks to reduce compliance costs and increase efficiencies for both them and for employees by allowing employers to distribute T4 slips electronically to current active employees without first having to receive the employees' consent (as is presently the case). In order to ensure that employee information remains confidential, adequate privacy safeguards will need to be in place before T4 slips can be sent to employees under the new measures. These privacy safeguards will be outlined by the Minister of National Revenue and will include provisions mandating employers to continue to provide paper T4 information slips to those employees who do not have confidential access to view or print their T4s. The explanatory notes to the Budget indicate that such persons would include employees who are on leave and former employees. To the extent that an employee requests paper copies of his or her T4 slips, the employer will be obliged to provide him or her with same.

This measure will apply for T4s issued for the 2017 and subsequent taxation years.

First-Time Donor's Super Credit will Expire after 2017

The Budget confirms that the so-called first-time donor's super credit will expire at the end of 2017.

The super credit was introduced in the 2013 federal budget, and provides for an additional 25% tax credit for the first $1000 donated to a registered charity by a donor who has not claimed a charitable donation tax credit since 2007. The measure was always intended to be temporary, available only for gifts made after 2012 and prior to 2018. The Budget confirmed that due to low take-up, small average amounts donated, and "the overall generosity of existing tax assistance for charitable donations", the super credit will be allowed to expire.

Charities might question whether the existing charitable donations tax credit system is overly generous so as to justify removing this donation incentive. Furthermore, if take-up was in fact low, the fiscal cost of the measure should not be excessive. That said, the expiry of this super credit is unlikely to have significant negative consequences on the sector.

Donors who have not claimed a charitable donation tax credit since 2007 should consider making a gift before the end of 2017 to take advantage of the super credit before it expires.

Creation of a Canada Cultural Spaces Fund

The Budget indicated that the Federal Government will be creating a new Canada Cultural Spaces Fund towards which it will contribute $300 million over the next 10 years for the purpose of developing Canadian talent and entrepreneurialism in the arts and cultural communities. This fund will focus on the construction, renovation, and equipment needs of creative hubs and "shared spaces" where artists can collaborate on the creation of artistic works.

Creation of Innovation Superclusters

The Budget indicates that the Federal Government is proposing to launch a competition to create "innovation superclusters" that will have access to significant government funding to develop innovations in various areas including clean technology and health/bio sciences. While this appears to be directed towards creating new economic growth opportunities for Canadian businesses and will ultimately be a business-led initiative, the clusters will consist of partnerships between organizations. Given the research and innovation focus, this new measure will interest universities, hospitals, and other research-focused organizations.

Gender Statement

The Federal Government has committed in the 2016 Fall Economic Statement to publish a gender based analysis ("GBA") of new budgetary measures in Budget 2017 and all future budgets. The final chapter of the Budget is Budget 2017's Gender Statement. It begins with an acknowledgment of women's presence in Canada's workforce and the persisting gender wage-gap. It defines gender based analysis as:

"...Analysis that identifies the ways in which public policies affect women and men differently. It does so through a systematic use of data to better tailor the design and delivery of government programs. ....."

As part of the Gender Statement, the Federal Government indicated that it is committed to using GBA across all government departments. The chapter proceeds to discuss and apply the GBA to various Budget measures introduced in 2016 and/or 2017. It identifies how the Federal Government considers these measures to be aimed at "reducing the gender wage gap, encouraging greater workforce participation among women, and helping to combat poverty and violence." These measures include the Canada Child Benefit, investments in skills training, investments in early learning and education, flexible work arrangements for federally regulated employees, and the elimination of time limits on vocational rehabilitation for spouses of veterans.

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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