What is Bill C-32?

The full name of the Bill is a mouthful: “An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 3, 2022 and certain provisions of the budget tabled in Parliament on April 7, 2022.”

In other words, it’s an act to implement budget and fall economic statement spending promises.

What’s Relevant for Charities?

As with most budget bills, this is a long one. This post is not an exhaustive overview. Instead, we’ve picked out a few items that will be of interest for charities.

DISBURSEMENT QUOTA

Increase to 5% for Property Exceeding $1M

Bill C-32 changes the definition and calculation of disbursement quota (DQ) in the Income Tax Act (ITA).  As promised in the 2022 Federal Budget, the DQ increases from 3.5% to 5% for the portion of property not used in charitable activities or administration that exceeds $1M.

This change is effective for tax years beginning on or after January 1, 2023.

See section 34(1) of Bill C-32; section 149.1(1) ITA.

Management & Administration Not Included

Bill C-32 clarifies that “expenditures on administration and management of the charity” are not deemed to be an amount spent on charitable activities or a gift to a qualified donee (basically, another charity). In other words, these costs don’t count toward a charity’s obligation to meet its DQ.

This change is effective for tax years beginning on or after January 1, 2023.

See section 24(2) of Bill C-32; *new* section 149.1(1.1)(d) of ITA

Discretionary Reduction in DQ

Bill C-32 amends the wording around the Minister’s discretionary reduction of the DQ.

In its current form, when the Minister agrees to reduce the disbursement quota for a charity’s tax year, the amount is “deemed to be an amount expended by the charity.” The new version will have the Minister “specify an amount” and the “disbursement quota shall be deemed to be reduced by that amount.”

Charities must still apply and the Minister still has discretion to grant or not grant the reduction. It’s simply that the prescribed amount is now deemed a reduction rather than an amount expended.

See section 34(4) of Bill C-32; section 149.1(5) ITA

Disclosing Applications for Reduction in DQ

The government can disclose “to any person” the application, information filed in support of a charity’s application, and a partial or full copy of any letter or notice from the Minister to the charity about its application to reduce its DQ.  This change is effective January 1, 2023.

This change is effective for tax years beginning on or after January 1, 2023.

See section 55(1) Bill C-32; s 241(3.2) ITA.

ACCUMULTATION OF PROPERTY

The section allowing charities, with the Minister’s approval, to accumulate property for a specific purpose, on specific terms and conditions, for a specific time, has been repealed.

This change is effective for applications made on or after January 1, 2023.

See section 34(5) of Bill C-32; former section 149.1(8) ITA

TRUST REPORTING

New Trust Reporting Requirements

In section 150(1.1) of the ITA, there is an exemption (s 150(1.1)) to filing required information returns. Bill C-32 changes that section so that there are more kinds of trusts that have to file T3 returns, unless the trust fits into a list of exceptions.

Content of Trust Reporting

Required information for trust reporting is listed in the Income Tax Regulations (ITA Regs). It includes:

• Name, address, date of birth, jurisdiction of residence, taxpayer identification number for each person who is a trustee, beneficiary, or has the ability to exert influence over trustee decisions (re: appointment of income or capital of the trust)

The required information about beneficiaries includes those “whose identity is known or ascertainable with reasonable effort by the person making the return at the time of filing” (s 204.2(2)(a) ITA Regs).

See section 72(1) Bill C-32; section 204.2 ITA Regs

Exceptions to Trust Reporting Requirements

What are those exceptions? There are a lot of them. If the trust:

• Has existed for less than 3 months
• Holds assets of less than $50K through the year and if the assets are one or more of:
  • Money
  • Debt obligation (see (a) of “fully exempt interest” in 212(3))
  • Share, debt obligation or right listed on a designated stock exchange
  • Share of capital stock of a mutual fund corporation
  • Unity of a mutual fund trust
  • An interest in a related segregated fund trust
  • An interest as a beneficiary under a trust with all units listed on a designated stock exchange
• Is required by law (federal, provincial, or rules of professional conduct) for the purpose of the activity regulated by those laws
• Is a registered charity
• Is a club, society or association
• Is a mutual fund trust
• Is a related segregated fund trust
• Is a trust with all units listed on a designated stock exchange
• Is prescribed to be a master trust
• Is a graduated rate estate
• Is a qualified disability trust
• Is an employee life and health trust
• Is a trust under/governed by a deferred profit-sharing plan, pooled registered pension plan, registered disability savings plan, registered education savings plan, registered pension plan, registered retirement income fund, registered retirement savings plan, tax-free savings account, employee profit sharing plan, registered supplementary unemployment benefit plan, first home savings account
• Is a cemetery care trust or trust governed by an eligible funeral arrangement

See section 35(1) Bill C-32; *new* section 150(1.1) ITA

Clarifications

A trust includes bare trusts and arrangements. What is a bare trust? A bare trust is one where the trustee’s “only function is to hold legal title to the property,” where that title is subject to the control and instructions of the beneficiary.

See section 35(2) Bill C-32; *new* section 150(1.3) ITA

The reporting does not require disclosure of information subject to solicitor-client privilege.

See section 35(2) Bill C-32; *new* section 150(1.4) ITA

Consequences for False Information or Omission

A person or partnership that fails to file a required trust return or makes a false statement (knowingly or due to gross negligence) is subject to a penalty equal to the greater of:

• $2,500 or 5% of the highest amount of the total fair market value of all property held by the trust.

See section 41(2) Bill C-32; *new* section 164(5), (6) ITA

Effective Date

This change is effective for tax years that end after December 30, 2023, one year later than in previously-released draft legislation.

CRA INFORMATION-GATHERING AUTHORITY

Earlier this year, during the Federal Finance Consultations on draft tax proposals, we fully explained the background of the changes to CRA’s information-gathering authority. In short, these changes respond to a 2019 Federal Court of Appeal decision (Cameco) that ruled the Minister of National Revenue exceeded its authority when CRA auditors compelled a corporation’s employees to give answers in an oral interview.

According to the Charter statement about Bill C-32, the amendments are to “modernize the information-gathering power” in s 231.1 and to clarify that, during an audit, people may be required “to attend at a place designated by the [government] authorized person or by video-conference and to answer the questions orally” [emphasis added].

See section 54(1) of Bill C-32; section 231.1(1) ITA

The post Federal Bill C-32: What’s Relevant for Charities? appeared first on CCCC Blogs.

The recently tabled Budget Implementation Act, 2022, No.1 (BIA) and its accompanying Explanatory Notes Relating to the Income Tax Act and Other Legislation show that Budget 2022 will take a very different approach than S-216.

Procedural sidenote: the BIA was preceded by a Notice of Ways and Means Motion. This motion “seeks to approve the budgetary policy of the government” and is a required step before taxation legislation can be read (introduced) for the first time.

Bill S-216 would amend the ITA to eliminate the “own activities” test. It aims to end the requirement that charities have to exercise “direction and control.” Instead, charities would have an obligation to take “reasonable steps” to ensure resources are used for only charitable activities.

The BIA, in contrast, does not eliminate “own activities” from the ITA. Instead, it adds a new category, called “qualifying disbursements.” In brief, qualifying disbursements are resource transfers from a charity to a non-qualified donee that are subject to mandatory conditions.

How does all of this work? Let’s walk through the definitions, conditions and distinctions.

What is a Qualifying Disbursement?

“Qualifying disbursements” are disbursements or gifts or resources from a charity to a “grantee organization” that are subject to certain conditions:

• The disbursement furthers a charitable purpose of the charity
• The charity ensures the disbursement is exclusively applied to charitable activities in furtherance of a charity purpose of the charity
• The disbursement meets prescribed conditions

What is a Grantee Organization?

A “grantee organization” is “a person, club, society, association or organization or prescribed entity, but does not include a qualified donee” [emphasis added].

Qualified donees are organizations that can issue official donation receipts. That usually means registered Canadian charities but also includes registered entities like journalism organizations, municipalities, amateur athletic associations.

By default, then, a grantee organization is not a registered charity.

What are the Prescribed Conditions?

The prescribed conditions that make a disbursement, gift or resource a “qualifying disbursement” are listed in a new section of the Income Tax Regulations (3703). 

All of these conditions must be met:

Written agreement that includes:

• Terms and conditions, including a requirement that all resources be used exclusively for charitable activities in furtherance of a charitable purpose
• Description of activities the grantee will undertake
• Requirement that resources not used for the intended purpose be returned
• Requirement that the grantee make period reports (at least annually) with details on the use of resources, compliance with terms and conditions, and progress made
• Requirement that the grantee provide a final written report, including a summary of results achieved, how resources were used, evidence that resources were used for intended purposes
• Requirement that books and records be given to charity or kept by grantee for minimum 6 years
• Requirement that books and records for disbursement be made available to the charity to inspect, audit, examine or copy

Preliminary inquiry

Before making disbursements, the charity makes inquires to be reasonably assured that the grantee will comply with all the requirements of the written agreement; this includes reviewing the grantee organization (and it’s directors, officers and like officials):

• Identity
• Prior history
• Practices
• Activities
• Areas of expertise

Charity provides ongoing monitoring, including

• Receiving periodic reports
• Verifying the disbursement is being applied for its intended purpose

Charity receives, reviews and approves the final report

Charity undertakes adequate remedial action when it becomes aware that any part of the agreement is not being complied with

What are the Reporting Requirements?

Another new regulation (3704) adds to the existing reporting requirements in ITA s 149.1(14). As part of their public information return, charities have to report:

• The name of each grantee organization that received more than $5000 from the charity
• The purpose of each reported qualifying disbursement
• The total amount disbursed by the charity to each named grantee organization

What else is Different?

Charitable Purposes

The BIA would change the definition of charitable purposes.

• Current definition: “charitable purposes includes the disbursement of funds to a qualified donee”
• BIA definition: “charitable purposes includes making qualifying disbursements”

Bill S-216 would not change anything related to charitable purposes but focuses instead on charitable activities.

• S-216 definition of charitable activities adds a new subsection to include: “making resources – including grants, gifts or transfers – available through transactions, arrangements or collaborations of any kind whatsoever in furtherance of a charitable purpose to a person that is not a qualified donee if those resources are made available by a charity that takes reasonable steps to ensure that those resources are used exclusively for a charitable purpose in accordance with subsection (27)”

Charitable Organization

The BIA would keep the terminology of “own activities” whereas Bill S-216 focuses on removing that phrase from the definition of charitable organization.

• Current: charitable organization is one where (a.1) all the resources … are devoted to charitable activities carried on by the organization itself
• BIA: charitable organization is one where (a.1) all the resources … are devoted to charitable activities carried on by the organization itself or to making qualifying disbursements.
• S-216: charitable organization is one where (a.1) all the resources … are devoted to charitable activities.

What Will Happen to S-216?

If S-216 is passed and receives royal assent before (or on the same day as) the BIA receives royal assent, S-216 is deemed never to come into force and is repealed.

How will this Impact Charities?

Right now the BIA is at second reading in the House of Commons and is being pre-studied by the Senate. Assuming the BIA passes in its current form it will mean charities can make qualified disbursements to non-qualified donees without the formal requirement of it being the charities “own activities.” In other words, charities can give funds to non-charities.

However, the conditions that have to be met are, in essence, the same as those under the “own activities” / direction and control requirements. Some have argued that the conditions for qualified disbursements are actually more onerous than under “own activities” /direction and control: Robert B. Hayhoe, Stephen Hsia, “The new qualifying disbursement rules: An improvement?” (2 May 2022), Miller Thomson Social Impact Newsletter.

Others have expressed concern that the new “qualifying disbursement” changes “don’t really appear to take us where we need to go”; see Aidan Macnab, “Ottawa proposes changes to how charities can fund third-party organizations”, Canadian Lawyer (3 May 2022).

The BIA changes raise a number of questions: will the conditions be too onerous? Will the reporting requirements add to the administrative burden? Will having a third category for the use of resources be unnecessarily complex and confusing? Will the distinction between “qualifying disbursements” and “own activities” though intermediaries be one without difference? Will it muddy the waters and expectations as between the two?

CCCC is concerned that these changes will indeed create confusion and that the changes, at best, will not decrease administrative burdens and at worst, will increase those burdens. The changes proposed in the BIA are not the changes proposed in Bill S-216. We support the aim of Bill S-216 and are concerned that the BIA will not effectively accomplish those goals.

One thing is clear – it’s too early to definitively state whether the BIA will actually make positive changes. We’ll be watching closely.

Looking for More?

For more information on Bill S-216, see

• Update: Bill S-216 on Direction and Control (3 March 2022)

• Bill S-216 on Direction and Control – Different Name, Same Aim (9 December 2021)

• What’s Happening with Bill S-222? (30 June 2021)

• Bill S-222: From Direction and Control to Reasonable Steps (10 February 2021)

For more information on direction and control, see our Resource Page in CCCC Knowledge Base. And for members interested chatting about the topic, you can head over to our dedicated discussion space in The Green.

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There is big budget news in the Federal Budget, 2022! Two key pieces relate to direction and control and the disbursement quota. We’ve summarized these two items along with other information relevant to charities from both the Budget and the Supplementary Information.

Below each summary is a link to the source documents. Note that the Budget links are as close to the topic as possible, but aren’t pinpoints, so you might have to scroll just a bit to find the precise section.

Direction & Control

Proposed changes are made to implement “the spirit of Bill S-216, the Effective and Accountable Charities Act” which is currently scheduled for second reading on May 13 in the House of Commons. A total of $165M from 2022-2027 has been allocated to fund stronger partnerships in the charitable sector.

Budget 2022 would allow charities to transfer resources (“make qualifying disbursements”) to non-qualified donees if they further the charity’s purposes and the charity ensures the funds are used for charitable activities.

Resource Accountability

How would a charity show accountability for its resources? Budget 2022 proposes these requirements:

• A pre-grant inquiry that provides reasonable assurances the resources will be used for purposes set out in a written agreement; it would include the following information about the recipient:
  • Identity
  • History
  • Practices
  • Activities
  • Areas of expertise
• A written agreement
  • Terms and conditions of funding
  • Description of charitable activities by recipient
  • Requirement that funds not be used for any other purpose
  • Requirement that records relating to the use of the funds be maintained and accessible for at least 6 years after the relevant tax year
• Monitoring
  • Periodic reports (at least annual)
  • Details of how funds spent
  • Sufficient evidence to show funds used for intended purposes
  • Show review and approval by granting charity of the reports
• Full and final reports
  • Outline results achieved
  • Details of how funds spent
  • Sufficient evidence to show funds used for intended purposes
  • Show review and approval by granting charity of the final reports
• Disclosure
  • Public disclosure on information returns of information relating to grants over $5,000

Additional Changes for Direction & Control

There are a couple additional changes to support the move away from direction and control:

• Books and records – Budget 2022 would require charities, when asked by Canada Revenue Agency (CRA), to take all reasonable steps to obtain receipts, invoices or other documentary evidence to show grantees spent the funds appropriately
• Directed donations – Budget 2022 would address concerns about charities acting as conduits by prohibiting registered charities from accepting gifts that are expressly or implicitly conditional on making a gift to a person other than a qualified donee

Budget: Stronger Partnerships in the Charitable Sector (PDF p 195)

Supplementary Information: Charitable Partnerships (PDF p 15-16)

For background on S-216: Update: Bill S-216 on Direction and Control

Disbursement Quota (DQ)

The DQ would increase from 3.5% to 5% for the portion of property not used in charitable activities or administration that exceeds $1M. The Income Tax Act will be amended to clarify that management and administration expenditures do not count toward satisfying the DQ.

CRA would have discretion to reduce a charity’s DQ for a particular tax year. The Budget proposes to publicly disclose information related to these decisions.

It also proposes to remove the accumulation of property rule.

These measures would be effective on or after January 1, 2023 and would be reviewed after five years.

Additionally, CRA will improve its collection of information as to whether charities are meeting their DQ and information about donor-advised funds.

Budget: Boosting Charitable Spending in our Communities (PDF p 196)

Supplementary Information: Annual Disbursement Quota for Registered Charities (PDF p 14-15)

For background on DQ: Disbursement Quota Consultation

CRA Funding

The Budget would give $1.2B more funding to CRA over five years, beginning 2022-23 to:

• Expand audits of large entities that engage in aggressive tax planning
• Increase investigation and prosecution of suspected tax evasion
• Expand education outreach programs

Revenue recovered through these efforts is projected to be $3.4B over five years.

Budget: A Fair Tax System (Reinforcing the Canada Revenue Agency) (PDF p 211)

Anti-Racism Strategy & National Action Plan on Combatting Hate

The Budget would provide $85M over four years, starting in 2022-23 to Canadian Heritage to launch a new Anti-Racism Strategy and National Action Plan on Combatting Hate.

The intent is to support community projects that ensure Black and racialized Canadians, and religious minorities have access to resources to raise awareness of issues related to racism and to support full participation in the Canadian economy.

It would also provide $11.2M over five years to Canadian Heritage and Global Affairs Canada in response to religious discrimination. The funds would be allocated to:

• Special Envoy on Preserving Holocaust Remembrance and Combatting Antisemitism ($5.6M)
• Special Representative on Combatting Islamophobia ($5.6M)

Budget: A Diverse and Inclusive Canada (Fighting Systemic Racism, Discrimination and Hate) (PDF p 184-185)

Supporting Black Canadian Communities

Employment and Social Development Canada would receive $50M over two years for the Supporting Black Canadian Communities Initiative (see, for example Federal Black-Led Philanthropic Endowment Fund). The Minister of Families, Children and Social Development is responsible for exploring more options to continue its support of capacity building within Black-led and Black serving community organizations.

Budget: A Diverse and Inclusive Canada (Supporting Black Canadian Communities) (PDF p 185)

GST/HST Health Care Rebate

Charities and not-for-profits that provide health care services like those available in hospitals are eligible for an 83% GST/HST rebate if the health care service is being delivered with the active involvement of a physician or in a remote community, a nurse practitioner.

Budget 2022 would expand eligibility for charities and not-for-profits by removing the “remote community” restriction to include those with active involvement of a nurse practitioner regardless of location.

It would apply to rebate claim periods ending after Budget Day.

Budget: Tax Fairness and Effective Government (Table, Additional Actions) (PDF p 217)

Supplementary Information: GST/HST Health Care Rebate (PDF p 53-54)

For All the Details…

Budget 2022

Tax Measures: Supplementary Information

The post What the Federal Government’s 2022 Budget Means for Charities appeared first on CCCC Blogs.

This is a great opportunity to share with the government the challenges and opportunities facing your organization. You can share your own ideas about the best ways forward and what you think the government should prioritize in the next budget.

One of the easiest ways to participate is to complete the Questionnaire. You can complete it in your capacity as a charity representative or as an individual. It’s a series of 10-15 multiple choice questions such as:

• What investment do you think would best help to create jobs and grow the economy?
• Which measures would you use to determine if Canada’s economy is recovering from the effects of the COVID-19 pandemic?
• How can the government help drive Canadian innovation to spur new jobs and growth?
• What are the most important ways the government can ensure an inclusive economic recovery that leaves no Canadian behind?
• What are your top priorities for Budget 2022?
• If you were designing the budget, what would you like to see to create jobs and grow Canada’s economy?
• What is one idea you have for how the federal government can help you or your community?
• Which of the following is the biggest financial concern for you?

It then asks more individual questions, such as the impact COVID-19 has had on your employment and earnings, where you live, your age, your gender, other identifying characteristics, and in what capacity you are completing the survey (individual, business owner, charity representative, etc.).

Alternatively, you can make formal submissions.

Consultations are open until February 25, 2022.

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