There is considerable question as to whether Federal Budget 2011 will receive the support of Parliament. However, CCCC is providing information about measures affecting charities on the possibility the budget may pass and because some of these provisions may return in future budgets.
Significant provisions within the Budget are focussed on enforcement to prevent fraud and abuse within the charitable sector. This is an attempt to ensure Canada Revenue Agency (CRA) has the tools necessary to ensure compliance. This is also a measure to ensure charitable donations are used for charitable purposes. These provisions should strengthen the work of legitimate charities.
In addition, the reporting requirements which have been in place for many years for charitable organizations and public and private foundations will be extended to other organizations who also have the right to issue official receipts, including registered Canadian amateur athletic associations, municipalities, corporations providing low-cost housing for the aged, foreign universities with Canadian students, and charitable organizations outside Canada to which the federal government has recently made gifts.
CRA to Monitor Backgrounds of Directors, Trustees and Officers
Effective January 1, 2012, CRA will have the right to suspend receipting privileges or revoke the registration of a charity where an ineligible individual controls or manages a charity directly or indirectly in any manner whatsoever, or is a director, trustee, officer or like official of a charity. CRA can also refuse to register a charity where the application is made by an ineligible individual or an ineligible individual is involved either directly or indirectly as a director, trustee, officer or like official within the organization.
An ineligible individual is a person:
- with an unpardoned criminal record for financial dishonesty, including tax evasion, theft, fraud or other offences involving breaches of the public trust
- who has been found guilty of a relevant offence within the past five years. A relevant offence is a noncriminal offence either specifically relevant to the operation of a particular charity or is an offence of financial dishonesty contravening any law in Canada except the Criminal Code. Offences of this type will include breaches of charitable fundraising, consumer protection, and securities legislation.
- who was a promoter of a tax shelter for which a charity was revoked within the previous five years
Criminal or relevant offences are not required to have been committed in Canada. They will be qualifying activities if, committed anywhere else in the world, they would be criminal or relevant offences if committed in Canada.
Charities will now be required to invest more time and care into recruiting suitable individuals to participate as directors, trustees, and senior staff. CCCC provides the following suggestions for charities:
- Implementation of a thorough screening process for all current and prospective directors, trustees, and senior staff. Although Budget 2011 specifically details that charities will not be required to perform background checks, these checks will likely become an automatic part of the recruitment process. There is no other way to confirm the absence of criminal history. Background checks should also be arranged for all currently serving directors, trustees, and senior staff, as Budget 2011 does not make exceptions for individuals who have already assumed their roles.
- All current and future directors, trustees and senior staff should be required to sign an annual declaration that they have not previously engaged in any qualifying criminal or relevant offences.
- A policy should be developed allowing the automatic removal of a director or trustee found to have violated the annual declaration.
This amendment to the Income Tax Act will affect all current and future charities registered in Canada. CCCC will continue to monitor details of this budget provision. Members will be advised of developments.
Although gifts given to and accepted by charities are generally considered to be irrevocable, there may be unusual circumstances where a charity determines a gift should be returned. Most charities will never face this circumstance.
Effective immediately, if a charity returns a gift to a donor and the value of the returned gift is greater than $50, the charity is required to issue a revised official receipt then file a copy with CRA. In consultation today with CRA officials, confirmation has been received that any revised receipts for returned gifts must be filed with CRA immediately, not at year end. CRA will also have the right to reassess taxpayers where the reassessments relate to returned gifts.
The May 2011 issue of the CCCC Bulletin will contain an article on the circumstances of when and how a charity may consider returning a gift.
Donations of Publicly Listed Flow-Through Shares
In this budget, donations of flow-through shares have been made less attractive to donors because an exemption threshold has been implemented. Effective immediately the exemption allowed for capital gains on donations of flow-through shares will be limited to increases in excess of the original cost of the shares.
Two additional provisions are also included in Budget 2011. These provisions are unlikely to impact CCCC members to a significant extent. Charities wishing to engage in these sophisticated gifting arrangements, should first ensure they obtain competent financial and legal advice on how to structure the arrangements. Both provisions are effective immediately:
- Gifts of Non-Qualifying Securities
The tax recognition of transfers of non-qualifying securities to charities must be delayed until disposition by the charity. Non-qualifying securities are most commonly shares in privately held corporations. This provision requires charities to issue official receipts for donations of non-qualifying securities only after the charity has sold or otherwise transferred the securities. The sale must occur within five years of the initial transfer of the securities to the charity. Charities will now be unable to provide a receipt for a transaction where the consideration for the transfer of the securities is another non-qualifying security.
- Granting Options to Charities
If charities obtain an option to acquire property in future, the tax implications for the taxpayer are delayed until after the charity exercises the option. The charity must issue a split receipt at the time the option is exercised, reflecting the amount paid by the charity for the option, if anything. There will be no intention to give, and consequently no receipt can be issued, where the cost of the option exceeds 80 per cent of the fair market value of the property. This is consistent with the previously announced split-receipting rules.