Authored by Derek B.M. Ross.
On February 11, 2014, the Minister of Finance presented Economic Action Plan 2014, the federal government’s 2014 Budget. As expected, the 2014 Budget introduced a number of new measures that will impact charities. The key proposals that are particularly relevant to charities are discussed and analyzed below.
1. New Provisions Related to Charitable Gifts Made in the Context of Death
[Update: these provisions were formally made law as a result of the Economic Action Plan 2014 Act, No. 2]
Currently, if an individual makes a charitable donation by will, the donation is treated for income tax purposes as having been made by the individual immediately before his/her death. The same is true where an individual designates a charity as the death beneficiary of the proceeds of an RRSP, RRIF, TFSA, or life insurance policy (“designation donations”). In these circumstances, the charitable donation tax credit can only be applied against the individual’s (as opposed to the estate’s) income tax otherwise payable. Conversely, a donation made by an individual’s estate may be applied only against the estate’s (not the individual’s) income tax otherwise payable.
The 2014 Budget introduced some changes to these rules in order to “provide more flexibility in the tax treatment of charitable donations made in the context of a death that occurs after 2015.”
Beginning in 2016, donations made by will and designation donations will no longer be deemed to be made by an individual immediately before his/her death. Instead, these donations will be deemed to be made by the estate, at the time at which the property that is the subject of the donation is transferred to the charity.
CCCC notes two practical changes that will result from this new rule, which will apply to the 2016 and subsequent tax years:
(1) The trustee of the individual’s estate will have more flexibility in determining the year(s) in which to allocate the available donation. Currently, an individual’s donation credit may only be claimed in the year of death or in the preceding year. As a result of the 2014 Budget, however, for deaths that occur after 2015, the trustee will have the flexibility to claim the donation among any of:
-the taxation year of the estate in which the donation is being made;
-an earlier taxation year of the estate; or
-the last two taxation years of the individual.
(2) For receipting purposes, the eligible amount of a gift made by will or donation designation will be the fair market value of the property at the time it is transferred to the charity. Currently, CRA’s technical interpretations suggest that the value to be used is the fair market value of the transferred property immediately before the individual’s death.[i] Since the value of property can potentially fluctuate between these two periods, this distinction should be carefully noted by charities for post-2015 gifts.
In order for a donation to qualify for these revised rules, the transfer to the charity must be made within the first 36 months after the individual’s death.
Estates will continue to be able to claim a charitable donation tax credit in respect of other donations in the year in which the donation is made or in any of the five following years.
2. E-filing for Charities’ Annual Information Returns (T3010)
As registered charities are well aware, they are required to file an annual information return (T3010) with CRA. Currently, there is no option to do so electronically. The 2014 Budget acknowledges that “this poses a significant administrative burden” for charities, and states that “this issue must be addressed to allow charities to devote more time and resources to charitable activities rather than administration”. The Budget proposes to provide $23 million over five years to CRA to modernize its information technology, so as to allow charities to apply for registration and file their annual information returns electronically for the first time. The Budget also provides that CRA will establish an “enhanced web presence on charitable giving trends and characteristics in Canada”.
The Budget does not provide further details about the logistics of an e-filing system, but CCCC does welcome the prospect of an electronic filing option for registered charities’ annual information returns.
3. New Provisions Targeting State Supporters of Terrorism Through Charities
The 2014 Budget proposes that, where a charity accepts a donation from a foreign state listed as a supporter of terrorism under the State Immunity Act, or from an agency of such a state, its registration may be revoked. Currently, only two states are listed under that legislation: the Islamic Republic of Iran and the Syrian Arab Republic.
The Budget also announced that CRA will provide charities with information about best practices for exercising due diligence when accepting gifts and avoiding terrorist abuse.
CCCC notes that the overwhelming majority of charities have no ties to terrorism whatsoever, but they should all be aware of the anti-terrorism and money laundering rules. Charities possess certain characteristics that can attract terrorists and make them susceptible to misuse for terrorist financing. Since charities operate in conflict areas or in places with little infrastructure or banking systems, and may need to move money, people, and goods frequently, they are uniquely positioned to provide a network and a “cloak of legitimacy” for terrorist activities. Charities may be unknowingly exploited by terrorist groups to launder money and transfer resources. Charities therefore need to be mindful of where their donations and support really come from, and where their monies are ultimately going.
The CCCC Bulletin Article, “Anti-Terrorism – Know Your Partners” provides practical tips to help charities guard against terrorism and money laundering schemes. CRA also maintains a Checklist for charities on avoiding terrorist abuse. In addition to the list of foreign states noted above, charities should be familiar with the lists made under the Criminal Code and Anti-Terrorism Act of individuals and entities associated with terrorism. It is important, perhaps more now than ever, for charities to monitor the identities of their donors and ensure they are not among these “listed entities”.
4. Increased Remittance Thresholds for Employer Source Deductions
Charities, like all employers, are required to remit source deductions for employees’ income tax, Canada Pension Plan contributions and Employment Insurance premiums.
The frequency of such remittances depends on the employer’s total average withholding amount in preceding calendar years. The 2014 Budget proposes to reduce the frequency of remittance of source deductions for certain employers by:
- Increasing the threshold level of average monthly withholdings at which employers are required to remit up to two times per month to $25,000 (up from $15,000); and
- Increasing the threshold level of average monthly withholdings at which employers are required to remit up to four times per month to $100,000 (up from $50,000).
This measure will apply in respect of amounts to be withheld after 2014.
CCCC notes that these increased thresholds may help alleviate the administrative burden for charities whose average monthly withholdings are less than $25,000 and $100,000 respectively.
5. Miscellaneous Provisions of Further Interest to Charities
In addition to the above, the 2014 Budget proposes to:
- encourage donations of ecologically sensitive land (the current 5-year carry-forward period for claiming these donations will be doubled to 10 years)
- reduce administrative costs associated with charitable lotteries by amending “outdated” provisions of the Criminal Code to allow charities to conduct various aspects of lotteries through the use of a computer (currently, charities are forced to process and activate all sales manually, and then send customers their tickets by mail); and
- remove, for certified cultural property acquired as part of a tax shelter gifting arrangement, the exemption from the rule that deems the value of a gift to be no greater than its cost to the donor.
Charities may also be interested to note that the Budget includes a brief discussion of social finance initiatives, and indicates that the Government is “committed to supporting Canadians’ use of innovative approaches to address pressing unmet social and economic needs.”
[i] See CRA technical interpretation 2011-0430131E5 (14 June 2012), online (Westlaw): <http://www.westlawecarswell.com/etsource/crabulletins/2011-0430131E5.htm>.
Noteworthy is provided for general information purposes and does not constitute legal or professional advice. Every organization’s circumstances are unique. Before acting on the basis of information contained in this blog, readers should consult with a qualified lawyer for advice specific to their situation.