Regulation of Charitable Giving in Canada

					Regulation of Charitable Giving in
      Canada – An Update
          Blaine Langdon
        Senior Policy Officer
       Canada Revenue Agency

• Purpose of today is to discuss some of the
  more recent changes to the Income Tax Act
  relating to registered charities and charitable
• 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

• Objections and Appeals process in place and

• Fairness process underway (primarily w/respect to

• 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
• 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
  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

• Non-Qualifying Securities (Gift is nil)
• Loanbacks (Reduce by the FMV of the property used)
• Loans of money or property to Directors or other non-
  arms length individuals
• Business transactions between registered charity and
  companies of Founder or Director

• 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
• 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
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

• Charities Electronic Mailing List
  • To connect, follow instructions on CRA’s
    Charities Web site (Electronic Mailing Lists link
    in left menu)

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