CHARITY LAW - Looking back at legislative, judicial impacts on charities

It was a busy year for charities in 2006. Although Canadian FundRaiser has covered most of the developments reviewed here by Terrance Carter and M. Elena Hoffstein of Carters Professional Corporation, they have encapsulated them conveniently to make a ready reference for readers' files. We present them as a series of three articles, the first covering recent changes, rulings and interpretations under the Income Tax Act.

The charitable sector in Canada has seen a number of important legislative, regulatory and common law developments during the last year which have significantly impacted how charities will operate both in Canada and abroad. The following Bulletin provides a brief summary of some of the more important of these developments, including recent changes under the Income Tax Act, new policies and publications from the Charities Directorate of Canada Revenue Agency, select federal and provincial legislative issues affecting charities, as well as a selection of some of the more significant court decisions over the past year.

1. Budget 2006, elimination of tax on gifts of public company shares: in the 2006 federal budget released on May 2, 2006, the Conservative government upheld its commitment to remove the capital gains tax on publicly listed securities donated to charities and extended this measure to gifts of ecologically sensitive land, effective immediately.

On June 22, 2006, Bill C-13, the Budget Implementation Act, 2006, implementing these provisions through the enactment of amendments to the ITA, received royal assent. For qualifying gifts made on or after May 2, 2006, there will no longer be a taxable capital gain and the entire amount of the donation tax credit will be available to be used against other sources of income.

In effect, this means that the tax benefit arising from a gift of publicly traded securities or ecologically sensitive land would be the same as if it were a gift of cash. From a practical perspective, donors of qualifying shares should instruct their broker to transfer the shares intended to be gifted directly to an investment account which the charity would need to set up with its own broker, with the transfer of shares being carried out electronically where possible.

Valuation system

For purposes of valuation, CRA will accept the closing bid price of the share on the date it is received or the mid-point between the high and the low trading prices for the day, whichever provides the best indicator of fair market value. Any gift acceptance policy that a charity might develop with respect to the receipt of publicly traded shares should deal with these issues, as well as consider under which circumstances the organization might refuse to accept such a gift, for example where the business or activities of the corporation conflict with the objects and values of the organization.

While the elimination of capital gains tax on publicly listed securities and gifts of ecologically sensitive land does not currently apply to gifts to private foundations at the time of writing, the government has indicated in the budget that it is intending to extend the measure, but in the interim will be consulting with the sector to develop some self-dealing rules to safeguard against potential conflicts of interest.

2. Bill C-33, proposed amendments to the Income Tax Actaffecting charities: on November 9, 2006, the department of finance released the long-awaited Notice of Ways and Means Motion to move forward with the proposed amendments to the ITA. The motion was introduced as Bill C-33, and received its first reading in the House of Commons on November 22, 2006 as the Income Tax Amendments Act, 2006. The proposed changes were last released by the department on July 18, 2005, which amended and consolidated earlier proposed amendments released on December 20, 2002, December 5, 2003 and February 27, 2004.

Split-receipting, tax shelters

A number of the proposed changes contained in Bill C-33 will significantly impact the operations of registered charities in Canada. Some of the most significant proposed changes involve the introduction of split-receipting rules and rules to curtail abusive donation tax shelter schemes. These changes are contained in subsections 248(30) to (41) of the ITA.

Other proposed amendments include new definitions for charitable organizations and public foundations, rules affecting the revocation of charitable registrations, municipal or public bodies performing a function of government in Canada as new qualified donees, and new expanded disclosure of information concerning registered charities to the public. The provisions contained in Bill C-33 are, for the most part, the same as the amendments released in July 2005, with a few exceptions including the withdrawal of the reasonable inquiry requirement, a provision with respect to inter-charity gifts, and circumstances involving the non-application of the deemed fair market value rule.

3. Foundations incurring debts to purchase investments: In a Technical Interpretation dated October 21, 2005, CRA reversed its position with respect to public and private foundations incurring debts for the purpose of acquiring investments, enabling both now to do so. Previously, CRA had always been of the view that the phrase "debts incurred in connection with the purchase and sale of investments" in paragraphs 149.1(3)(d) and 149.1(4)(d) of the ITA would only permit a miscellaneous type of debt, such as brokerage fees or other incidental amounts that could relate either to the purchase or the sale of investments.

CRA explained that the reason for the change in its policy was that "jurisprudence has confirmed that the phrase 'in connection with' has very broad meaning." However, CRA indicated that debt arrangements would continue to be reviewed by CRA, especially those involving non arm's length parties, in order to ensure that there are no other compliance issues, such as personal benefit.

4. Meaning of "charitable activities": in a Technical Interpretation dated October 23, 2006, CRA considered the meaning of "charitable activities" for the purpose of providing guidance on the difference between expenditures on charitable activities and the expenditures on management and administration when determining whether a registered charity has met its 80% disbursement quota.

In cases where expenditures are partly attributable to charitable programs and partly to management and administration, it is necessary to allocate the expenditures between these two categories and the allocation should be made on a consistent and reasonable basis. CRA recognized that in practice it is not always easy to draw the line between these two categories and indicated that it has undertaken to review the issue further.

Reward points

5. Reward points/airline tickets: in a Technical Interpretation dated July 18, 2006, CRA reiterated its policy with respect to charitable donations of air travel points. Care must be taken to determine if the donation qualifies as a gift for the purposes of section 118.1 of the ITA, particularly with respect to whether the points may be transferred. A charity that receives premium points which qualify as a gift must include the value of the points in determining its income, and it may issue an official tax receipt for the gift.

If a receipt is issued, the value of the premium points will be included in the calculation of the charity's disbursement quota. As long as the gift is used by the charity in connection with its charitable activities, there should be no other tax implications for the charity. It is not recommended that premium points be held for a long period of time because their value could possibly diminish or the points could expire, causing potential problems from a valuation perspective. It could also possibly expose the charity to the consequences of failing to devote its resources to charitable activities.

6. Charity Texas Hold'em tournaments: on April 25, 2006, CRA released a Technical Interpretation in connection with subsections 248(31) and 248(32) of the ITA. CRA indicated that when determining the "eligible amount" of a gift for the purposes of an income tax receipt for a Texas Hold'em poker tournament, the amount of the "advantage" allocated to each participant will include the total prize money divided by the number of participants and an amount equal to what a participant would pay to play in a similar Texas Hold'em poker tournament that is not sponsored by a charity. However, charities should be aware that in many provincial jurisdictions, including Ontario, such tournaments may not be legal as they would not fall within the "charitable gaming" exception in the Criminal Code.

7. Private foundations investing in limited partnerships: in an advance income tax ruling dated June 27, 2006, CRA considered the issue of whether a private foundation would be considered to be carrying on a business by virtue of its foreign limited partnership such that the private foundation's registration could be revoked pursuant to paragraph 149.1(4)(a) of the ITA. CRA took the position that the foundation's registration could be revoked if it was established that the foreign limited partnership was a partnership for Canadian tax purposes.

This bulletin was written by Terrance Carter and M. Elena Hoffstein of Carters Professional Corporation and can be found at www.carters.ca/pub/bulletin/charity/2007/chylb107.pdf.