The CRA has posted a note on the new anti-avoidance rules and designated gifts for Canadian charities that were introduced in the March 2010 Federal Budget.
New anti-avoidance rules and designated gifts
The 2010 Federal Budget introduced new anti-avoidance provisions regarding gifts made between registered charities that are not at arm’s length. The budget also introduced the concept of a designated gift.
A registered charity that receives a gift from another registered charity that is not at arm’s length must spend 100% of the fair market value of the gift (determined at the time of the gift):
•on its own charitable activities; or
•on gifts to qualified donees that are at arm’s length.
A registered charity must meet this anti-avoidance spending requirement in the fiscal period the gift was received, or in the following fiscal period. If a charity does not spend the amount on time, it may be subject to a penalty of 110% of the amount that it failed to spend, or to revocation of its registered status.
The anti-avoidance spending requirement is in addition to a charity’s disbursement quota requirement.
If the donor charity chooses to designate the gift as outlined below, the recipient charity will not be subject to this additional spending requirement.
A designated gift is a type of gift made between registered charities that are not at arm’s length.
To designate a gift, the donor charity must indicate the gift is a designated gift in its information return for the fiscal period in which the gift is made. Charities that need to report a designated gift can use Form T1236, Qualified Donees Worksheet / Amounts Provided to Other Organizations. On the blank line below the BN/Registration number of the recipient charity, write designated gift and the amount of the gift that is designated.
A donor charity cannot use the designated gift to satisfy its disbursement quota. It cannot include the gift as:
•an amount spent on charitable activities (line 5000); or
•an amount transferred to qualified donees (line 5050).
We recommend that the donor charity inform the recipient charity that a gift is a designated gift to allow the recipient charity to adequately track its own spending requirement for the fiscal period.
If the recipient charity holds on to the designated gift and does not use the gift in its charitable activities or administration, it may subsequently have to consider the value of the designated gift when determining the average value of property not used directly in charitable activities or administration for the calculation of its disbursement quota.
•Charities: Disbursement quota reform
Do you require legal advice with respect to Canadian or Ontario non-profits or charities?
Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.