Regulation of Charitable Giving in Canada

Regulation of Charitable Giving in Canada – An Update Blaine Langdon Senior Policy Officer Canada Revenue Agency Overview • Purpose of today is to discuss some of the more recent changes to the Income Tax Act relating to registered charities and charitable giving • Discuss some of the issues surrounding charitable giving that the the CRA is taking an interest in Budget 2007 • In Budget 2007 the Federal Government proposed to eliminate the taxation of capital gains arising from donations of publicly-listed securities to private foundations • Also extended the measures relating to employees that acquire publicly-listed securities under an option granted by the employer and donate these to a charity within 30 days, to private foundations Excess Business Holdings Regime • • Budget 2007 also introduced a compliance regime to limit shareholdings by private foundations A Private foundation will be required to divest itself of shareholdings where the foundation: a. Holds more than 2% of any share class, and b. The combined holdings of the foundation and non-arm’s length parties exceed 20%. • Existing shareholdings of foundations are subject to a transitional period Donations of Medicines • Special incentives were introduced by Budget 2007 for donations by corporations of medicine held in inventory, to a registered charity that has received a disbursement under a program of the Canadian International Development Agency Bill C-33 – First Reading • Contains a variety of pending technical amendments to the ITA • “Split-receipting” legislation (Effective for gifts made after December 20, 2002) • Tax shelter rules regarding deemed FMV and repayment of limited recourse debts (Effective December 5, 2003 and February 19, 2003) • Replacement of the “contribution test” for foundations with the “control test” (applicable to fiscal years after 1999) Administrative Changes • Increased audit coverage • Audits are now conducted by regional offices • Desk audit function now fully operational • Intermediate Sanctions process in place (Graduated Approach) • Objections and Appeals process in place and operational • Fairness process underway (primarily w/respect to penalties) Penalties • 188.1(7) - Incorrect information: Every registered charity that issues, in a taxation year, a receipt for a gift otherwise than in accordance with this Act and the regulations is liable to a penalty equal to 5% of the eligible amount of the gift • Can apply to: Missing information, incorrectly recorded values, incorrect date of gift, incorrect donor etc. • Penalty increased to 10% for subsequent infractions (Penalties are applicable to taxation years after March 22, 2004) Penalties (continued) • 188.1(9) – False Information: A person who makes or participates in the making of a false statement on a receipt is liable to a penalty equal to 125% of the eligible amount • Can apply to: Fraudulent receipts, receipts where the person knew, or would reasonably be expected to know, the information being recorded was incorrect • Mandatory suspension of the charity if total penalty exceeds $25,000 • Penalty under 163.2 may also apply to individuals involved Under a Microscope – Transactions that Draw the Attention of the CRA Tax Shelters • Buy-Low Donate High Schemes, Limited Recourse Debt Arrangements, Gifting Trusts • 100% audit coverage of tax shelters • CRA has now reassessed thousands of taxpayers for hundreds of millions of dollars • Will result in the application of False Information penalties against charities Non-Arm’s Length Transactions Includes: • Non-Qualifying Securities (Gift is nil) • Loanbacks (Reduce by the FMV of the property used) • Loans of money or property to Directors or other nonarms length individuals • Business transactions between registered charity and companies of Founder or Director Non-gifts • Receipts issued for services provided to the charity (e.g., consulting fees, rental space) • Receipts issued for payments for services offered by the charity (e.g., tuition fees, daycare) • Receipts issued for payments that are not voluntary (e.g., contractual obligations, court ordered payments) • Receipts issued for non-transfers (e.g., loans of property) • Receipts issued for lotteries or draws Benefits provided by Charities • 248(32) requires that any benefits (advantage) provided with respect to a gift must be deducted from the eligible amount of the receipt • Registered charities that provide some recognition, with respect to donations, in the form of advertising and sponsorship need to deduct this from receipts • Benefits provided by third-parties are also covered Common Problems Properly establish FMV • Vital in order to issue a receipt – knowing the value of what you have received (and what you give back) • Simply accepting the FMV advanced by the donor without question is fraught with peril • The deemed FMV rule will apply where a donor gifts property acquired within the last 3 years or through a gifting arrangement • Failure to take the proper steps to ensure the FMV is correct may result in the reassessment of the donor, monetary penalties to the charity or both Common Problems Timing is often key • A registered charity must issue its receipts reflective of the actual date of the gift • If the donation was made in a particular taxation year, it must be issued for that particular taxation year • A charity that receives non-cash gifts must establish the value at the time of donation. It is not what an item subsequently sells for (e.g., at auction) that establishes the FMV. It is also not necessarily what the value of the property is at the time the charity actually receives it Common Problems Who is your donor? • A registered charity must issue its receipts in the name of the actual donor • The CRA does not support after-the-fact tax planning. Once a donor has made a gift the charity cannot subsequently alter or re-issue receipts to accommodate more individuals • Where a corporation or business makes a donation, the receipt should be issued in its name Common Problems You Can’t Give it Back • Property, once received, can only be used to further the charitable purposes of the organization. Perfected gifts are irrevocable • Property can generally only be returned to a donor through a court direction. It is not sufficient that both parties agree (this applies equally to varying the terms of a trust or direction) • If you are collecting funds for a particular purpose, inform donors in advance what will become of property if the original purpose becomes impossible to fulfill Common Problems Remember your DQ • Every receipt issued will have an effect on a charity’s disbursement quota. Advance planning is key to avoiding a disbursement quota shortfall • Relief is available – 10 year gift directions, permission to accumulate property, permission to reduce the DQ • 10 year gift directions must be sought in advance. As the name suggests, 10 year gifts must be held for 10 years Common Problems Do you even want it • Many charities accept property just because it is offered. Charities need to ask whether they can use the property and/or afford to accept it • Has to be (in some reasonable sense) used in your charitable programs. Simply giving it away may run you afoul of the CRA Contact Us • Charities Information Line • 1-800-267-2384 (English) • 1-888-892-5667 (bilingual) • Charities Information on the Web • WWW.CRA.GC.CA/CHARTIES • Charities Electronic Mailing List • To connect, follow instructions on CRA’s Charities Web site (Electronic Mailing Lists link in left menu)