What the March 19, 2007 Federal Budget Means for Charities
March 20, 2007
There are various provisions in Budget 2007 that relate to Canadian charities. As with all budgets, some of the details to the amendments are yet to come. These provisions, in summary form only, are:
1) Corporate Gifts of Medicine out of Inventory
Corporations are eligible for a charitable donation deduction for donations of medicine from inventory equal to the fair market value of such medicine. However, under the Income Tax Act rules pre Budget 2007, the corporation obtained the same tax result whether the inventory was given to the charity or destroyed.1
After March 19, 2007 corporations should now be able to benefit from their donations of medicine from inventory since they will be entitled to receive an additional charitable donation deduction for this gift under certain conditions. The additional deduction amount will be equal to the lessor of:
- 50% of the amount by which the fair market value of the donated medicine exceeds its cost; and
- the cost of the donated medicine.
A corporation may only take advantage of this additional deduction if they make the donation to a registered Canadian charity that has also received funds under a program of CIDA (the ‘Canadian International Development Agency’) provided the medicine will be used outside of Canada.
(See Notice of Ways and Means Motion to Amend the Income Tax Act resolution (23)).
2) Elimination of Capital Gains Tax on Gifts of Publicly-Listed Securities to Private Foundations
As of Budget 2006, when a donor gifted publicly-listed securities to public foundations and/or charitable organizations they no longer had to pay tax on the increase in value of those shares (i.e. the ‘capital gain’). As of Budget 2007, this exemption is now extended to private foundations as well. Similarly, a related provision will now also allow an arm’s length employee who acquires publicly-listed securities under an employer stock option plan to donate those securities to a private foundation within 30 days without income tax consequences.
The historical concern with extending the zero-rate capital gains tax rate to gifts of publicly-listed securities given to private foundations was a concern about self-dealing by persons connected to the private foundation. To that end, Budget 2007 also introduces an ‘excess business holding regime’ that will place limits on the shares (both publicly-listed and unlisted shares) that a private foundation can hold. The regime also takes into account the shares held by someone not at arm’s length to the foundation.
The ‘excess business holding regime’ sets out three categories or phases for private foundations: the ‘safe harbour’ phase (no action required if foundation owns 2% or less of all outstanding shares of a class); the ‘monitoring phase’ (where foundation owns more than 2% of all outstanding shares of a class). In this phase reporting to CRA will be required including setting out all shares held in all classes of a corporation by the foundation and any non-arm’s length persons); and the ‘divestment required’ phase (where the foundation and all non arm’s length persons together own more than 20% of all outstanding shares in any share class of a corporation). Here the foundation will have reporting requirements and will be required to take steps to divest itself of shares to bring it into either the ‘monitoring phase’ or the ‘safe harbour’.
Penalties will apply to ‘excess business holdings’ that are not divested of as required by the new legislation. The penalty will be 5% of the value of the excess holdings for a first offence, and if a second penalty is levied within five years of the first penalty, the penalty rate will increase to 10%.
Information about ‘excess business holdings’ will be made public in both the monitoring and the divestment required phase. There is a compliance period and many transition rules particularly for those private foundations that find themselves immediately in a position of having ‘excess business holdings’.
(See Notice of Ways and Means Motion to Amend the Income Tax Act resolutions (3) and (4)).
3) New Anti-Avoidance Rules via Changes to the ‘Non-qualifying Securities’ Rules
Some of the ‘non-qualifying securities’ rules that deal with donations of securities (publicly listed and private) where the donor does not deal with the charity at arm’s length will be amended.
(i) If a person makes a donation to a charity (organization, public or private foundation) and then the charity loans the property back to the donor, the value of the gift for charitable tax receipting purposes is reduced. As of March 19, 2007, this ‘loan-back’ rule will be extended to loan-backs made to arm’s length persons as well.
(ii) Generally, if a person donates non-qualified securities to a private foundation a charitable tax receipt may not be issued until the foundation sells the securities, which allows it to establish the value of the securities. Some donors get earlier recognition of the gift by giving the securities to a trust which names the charity as the beneficiary. As of March 19, 2007, this mechanism will no longer be available if the donor is ‘affiliated’ with the trust.
The complete Budget 2007 documents are available at: http://www.fin.gc.ca/fin-eng.html.
Endnotes
1. Why? If a corporation gifted inventory to a charity it was deemed to have disposed of its inventory at its fair market value. If the fair market value exceeded the value of the inventory for income tax purposes (i.e. valued at the lower of cost or market) the excess was added to corporate income for tax purposes. Thus, the charitable donation deduction offset the corporation’s cost of carrying the inventory as well as any gain that arose on the deemed disposition of the inventory. However, this would put the corporation in the same position it would have been in, had it destroyed the inventory (e.g as obsolete) and claimed the write-off as an expense.
