Although Canadian FundRaiser has covered most of the devleopments reviewed here by Terrance Carter of Carters Professional Corporation and M. Elena Hoffstein of Fasken Martineau DuMoulin, they have encapsulated them conveniently to make a ready reference for readers' files. We present them as a series of three articles, as was done with the comparable review of 2006 legislative changes.

The charitable sector in Canada has seen a number of important legislative, regulatory and common law developments in 2007 which have significantly impacted how charities operate both in Canada and abroad. The following articles provide an up to date summary of some of the more important of these developments over the whole of 2007, including recent changes under the Income Tax Act, new policies and publications from the Charities Directorate of Canada Revenue Agency, select federal legislative issues affecting charities, as well as a selection of some of the more significant court decisions during the past year.

Changes, rulings and interpretations under the Income Tax Act

The 2007 federal budget passed as Bill C-28

The budget introduced a number of measures which will have a substantial impact on tax planning for charities and their donors. These measures include the elimination of capital gains tax on publicly-listed securities donated to private foundations, new excess business holding rules that limit the shareholdings of private foundations, and a special deduction for corporations that make donations of medicines from their inventory to registered charities that have received a disbursement under a program of the Canadian International Development Agency in respect of activities of the charity outside of Canada. These legislative initiatives were contained in Bill C-28, which received royal assent on December 14 and was enacted as Budget and Economic Statement Implementation Act, 2007.

Among the tax measures enacted by Bill C-28 are the proposed new excess business holding rules ("EBHR"). In general, the new EBHR require a private foundation to divest itself of excess public and private shareholdings beyond the limits permitted by the new rules, and to disclose material corporate shareholdings in its annual information return.

A private foundation that holds an "insignificant interest" (ie 2% or less) in respect of a class of shares of a corporation will not be subject to the divestiture or the public disclosure requirements under the EBHR. If the total shareholdings of a private foundation and "relevant persons" in respect of the private foundation who hold a material interest in a class of shares is more than 2% of all outstanding shares of that class, the private foundation will be required to disclose in its annual information return the name of the corporation, the foundation's holdings of that class of shares, and the total shareholdings of the relevant persons of that class of shares.

In addition, "material transactions" of a private foundation and its relevant persons are also required to be disclosed. A "material transaction" means a share transaction or a series of transactions involving more than $100,000 or .5% of a class of shares. A "relevant person" is generally a person who does not deal at arm's length with any person who controls the private foundation, or with any member of a non-arm's length group of persons that controls the foundation. The existing rules of s. 251 of the ITA, which determine when a corporation is related to another person, will apply as if the foundation were a corporation.

However, a "relevant person" does not include an estranged family member. For example, an individual who is at least 18 years old, living separate and apart from the controlling person or member of the controlling group, and whom the minister, on review of an application by the foundation, has agreed is dealing at arm's length with the controlling person or member of the controlling group, would not be a relevant person.

If the total corporate shareholdings of a private foundation and its relevant persons exceeds 20%, the foundation will be required to divest itself of the shares over the 20% threshold within certain time periods required by the EBHR, depending on how the excess arose. For example, if the excess arose as a result of the private foundation's acquiring shares for consideration, the excess must be divested within the same year; and if the excess arose as a result of a donation by way of a bequest, the excess must be divested within five years. Under certain conditions such as a large donation of shares involving complex corporate structures, the Minister of National Revenue may defer a divestment obligation by up to five years upon application by the foundation.

The EBHR exempt certain shares from divestiture. A private foundation will not be required to divest shares donated before March 19, 2007, if the donation was made subject to a trust or direction that the foundation may not dispose of them. This exemption also applies to donations made on or after March 19, 2007, and before March 19, 2012, pursuant to the terms of a will signed before March 19, 2007, that has not been amended. It also applies to donations made after March 19, 2007, under the terms of a testamentary or inter vivos trust created before March 19, 2007, and not amended after that date.

The EBHR provide transitional rules for private foundations with total corporate holdings exceeding the 20% threshold on March 18, 2007. These foundations will have up to 20 years to divest the excess, provided that they divest at least 20% of the excess every five years. In order to encourage private foundations to divest their excess as soon as possible, donations of publicly listed shares to a private foundation that has not divested all excess by March 18, 2012, will be subject to capital gains tax resulting from the disposition and will not enjoy the capital gains tax exemption proposed by the 2007 federal budget. A penalty tax may be imposed on a foundation that has not divested its excess shareholdings as required or that fails to comply with the disclosure requirements. Repeated or uncorrected infractions of the EBHR may result in the revocation of the foundation's charitable status.

The Ministry of Finance's news release of November 13, 2007, indicates that it is continuing its consultation with private foundations and intends to review further the EBHR that have been enacted, especially in relation to unlisted securities held on March 19, 2007 and the treatment of corporations wholly-owned by private foundations. Proposed new changes to the EBHR are expected to be released sometime in 2008.

The application of the EBHR is complicated and unclear in many respects. As such, private foundations, their donors and advisers will need to become familiar with the EBHR to ensure compliance. Where appropriate, private foundations may want to consider applying to be redesignated as either public foundations or charitable organizations.

Former Bill C-33 to amend the ITA is now Bill C-10

On October 29, 2007, the former Bill C-33 to amend the Income Tax Act was reintroduced in Parliament as Bill C-10. The former Bill C-33 had been introduced in November 2006, containing a package of proposed amendments to the Income Tax Act that were first introduced by Finance on December 20, 2002.

A number of the proposed changes will impact the operations of registered charities in Canada in a substantial way, including the definition of "gift', split-receipting, designation of charitable organizations and public foundations, revocation of charitable registrations, etc. These amendments have undergone various incarnations on December 5, 2003, February 27, 2004, and July 18, 2005, resulting in the introduction of Bill C-33 in November 2006. Since Parliament was prorogued in September 2007, Bill C-33 died on the order paper. The amendments were reintroduced as Bill C-10 in October 2007. Bill C-10 received three readings in the House of Commons on October 29, 2007, and second reading in the Senate on December 4, 2007. Bill C-10 is expected to be passed early in 2008.

CRA begins to administer new charity designation test

CRA has clarified that although Bill C-10 has not yet been enacted, CRA has begun reviewing applications for charitable status and for redesignation by using the proposed new definition for charitable organization and public foundation (which also affect the definition for private foundation). The new definition replaced the "contribution test" with a "control test". Under the new "control test", more than 50% of the capital of a charitable organization or public foundation can be contributed by a person or a group of related persons, provided that they do not control the charity in any way. In addition, this person, or members of the related group, may not represent more than 50% of the directors, trustees, officers and similar officials of the charitable organization or public foundation. Charities that do not meet this test will be designated as private foundations.

Applications for redesignation can be made retroactively for taxation years that begin after 1999. Registered charities will have until 90 days after Bill C-10 receives royal assent to apply for retroactive redesignation. Applications received after that date will fall under these new rules, but the redesignation will only become effective for future taxation years. CRA is currently developing guidelines for applying the new control test. To view further details on the administration of these changes, please refer to CRA's website at www.cra-arc.gc.ca/tax/charities/whatsnew/changes-e.html.


This bulletin was written by Terrance Carter of Carters Professional Corporation, tcarter@carters.ca, and M. Elena Hoffstein of Fasken Martineau DuMoulin, ehoffstein@fasken.com, and can be found at www.carters.ca/pub/bulletin/charity/2008/chylb131.pdf.