Finance moves to implement outstanding tax amendments affecting charities and donations

October 24, 2012 | By: .(JavaScript must be enabled to view this email address) Mark Blumberg
Topics: News, What's New from the Charities Directorate of CRA, Canadian Charity Law

Financed announced today a detailed Notice of Ways and Means Motion to implement certain outstanding technical amendments to the Income Tax Act.  A number of them relate to charities in Canada and donations to Canadian charities.  For example the split receipting rules, deemed fair market value rules, and rules to prevent artificial transactions.  The press release advises “The last comprehensive package of technical income tax legislation was passed by Parliament in 2001. This has led to a significant backlog of outstanding measures,” said Minister Flaherty. “Today’s Notice of Ways and Means Motion will begin the process of addressing the backlog.”” 

You can read more here:

http://www.fin.gc.ca/n12/12-129-eng.asp
http://www.fin.gc.ca/drleg-apl/nwmm-amvm-1012-eng.asp
http://www.fin.gc.ca/drleg-apl/nwmm-amvm-1012n-05-eng.asp


Here is some of the explanatory notes:

“Charitable Donations Deduction

ITA
110.1

Section 110.1 of the Act provides a deduction in computing taxable income in respect of gifts made by corporations to qualified donees. Section 110.1 is amended to expand the entities referred to in this section to include municipal or public bodies performing a function of government in Canada. This amendment is in response to the Quebec Court of Appeal decision in Tawich Development Corporation v. Deputy Minister of Revenue of Quebec, 2001 D.T.C. 5144. For additional information, see the commentary to paragraph 149(1)(d.5).

Section 110.1 is also amended as a consequence of the addition of new subsections 248(30) to (38) of the Act. Generally, those subsections clarify the circumstances under which a transfer of property will be considered a gift notwithstanding that the transferor may be entitled to receive an advantage or benefit in respect of the property. New subsection 248(31) generally provides that the “eligible amount” of the gift is the excess of the fair market value of a property transferred by way of gift over the value of the advantage or benefit, if any, to which the transferor is entitled. For additional information, see the commentary to new subsections 248(30) to (39).

Deduction for Gifts

ITA
110.1(1)

Paragraphs 110.1(1)(a) to (d) of the Act provide, respectively, for the deduction by a corporation of amounts in respect of “charitable gifts”, “gifts to Her Majesty”, “gifts to institutions” and “ecological gifts”. The amount deductible by the corporation is generally the fair market value of the gift. These paragraphs are amended, consequential to the addition of new subsection 248(31) of the Act, to provide that the amount deductible by the corporation is generally the “eligible amount” of a gift.

In addition, paragraph 110.1(1)(d) is expanded to provide that a deduction is available in respect of gifts made by corporations to municipal or public bodies performing a function of government in Canada.

Paragraph 110.1(1)(d) is also amended to clarify its application to “real servitudes” under the Civil Code of Quebec.

The amendments to subsection 110.1(1) apply in respect of gifts made after December 20, 2002, except that subparagraph 110.1(1)(d)(i) is amended for gifts made after May 8, 2000 and before December 21, 2002 to add a reference to municipal or public bodies performing a function of government in Canada.

Proof of Gift

ITA
110.1(2)

Subsection 110.1(2) of the Act provides that a corporation may not deduct an amount in respect of a gift unless the gift is evidenced by a receipt containing prescribed information. The subsection is amended, concurrently with subsection 110.1(1) of the Act, to refer to the “eligible amount” of a gift.

It is proposed that subsections 3501(1), (1.1) and (6) of the Regulations be amended to provide that every official receipt issued by a registered organization in respect of a gift contain, in addition to the information already prescribed, the amount of the advantage, if any, and the eligible amount of the gift.

For additional details, see the commentary to new subsections 248(31) and (32) of the Act regarding the eligible amount and the amount of the advantage in respect of a gift.

These amendments to subsection 110.1(2) of the Act and subsections 3501(1), (1.1) and (6) of the Regulations are to be effective in respect of gifts made after December 20, 2002.

Gifts of Capital Property

ITA
110.1(2.1) and (3)

Subsection 110.1(3) of the Act provides that, if a corporation donates capital property to a charity, it may designate a value between the adjusted cost base and the fair market value of the donated property to be treated both as the proceeds of disposition for the purpose of calculating its capital gain and the amount of the gift for the purpose of the deduction allowed for charitable donations under subsection 110.1(1) of the Act.

Subsection 110.1(3) is restructured as new subsection 110.1(2.1) and revised subsection 110.1(3). New subsection 110.1(2.1) describes the circumstances under which amended subsection 110.1(3), which remains generally unchanged, will apply. However, where the property is depreciable property, subsection 110.1(2.1) includes those situations where the actual value of the gifted property is between the undepreciated capital cost of that class at the end of the taxation year of the corporation and the fair market value of the donated property.

Amended subsection 110.1(3) provides for the amount that may be designated by the corporation. As with the former provision, the amount designated is considered to be the corporation’s proceeds of disposition of the gift. The subsection also continues to provide that the amount designated is treated as the fair market value of the property transferred by way of gift. However, under the amended version, this is for the purpose of new subsection 248(31) of the Act instead of for subsection 110.1(1). New subsection 248(31) generally provides that the “eligible amount” of a gift is the excess of the fair market value of a property transferred by way of gift over the value of the advantage or benefit, if any, to which the transferor is entitled. The “eligible amount” is relevant to the determination of the amount deductible under subsection 110.1(1) by the corporation.

Finally, amended subsection 110.1(3) allows a corporation to reduce the amount of recaptured depreciation that might otherwise be calculated in respect of a gift of depreciable property, with a corresponding reduction to the eligible amount deductible under subsection 110.1(1) in respect of the gift. However, the designated amount may not be lower than the amount of any actual proceeds of disposition in respect of the property (or, more specifically, the amount of the advantage in respect of the gift, as defined in new subsection 248(32) of the Act).

In particular, the amount designated by the corporation in respect of the property transferred may not exceed the fair market value of the property otherwise determined, and may not be less than the greater of
•the amount of the advantage, if any, in respect of the gift, and
•the adjusted cost base of the property or, if the property is depreciable property of the corporation, the undepreciated capital cost of the class of the property at the end of the corporation’s taxation year (determined without reference to the proceeds of disposition designated in respect of the property).

See also the example in the commentary to subsections 118.1(5.4) and (6) of the Act, which apply similarly to individuals as do subsections 110.1(2.1) and (3) to corporations.

Subsections 110.1(2.1) and (3) of the Act (as amended) generally apply in respect of gifts made after 1999. For additional details regarding the eligible amount and the amount of the advantage in respect of a gift, see the commentary to new subsections 248(31) and (32) of the Act.

Gifts Made by a Partnership

ITA
110.1(4)

Subsection 110.1(4) of the Act allows the attribution of gifts made by a partnership to its corporate members, according to each member’s share in the partnership. Subsection 110.1(4) is amended, consequential to the addition of new subsection 248(31) of the Act, in respect of gifts made by a partnership after December 20, 2002, to refer to the “eligible amount” of a gift made because of a corporation’s membership in a partnership.

Ecological Gifts

ITA
110.1(5)(b)

Subsection 110.1(5) of the Act provides that the fair market value of a gift of ecologically sensitive land (or a covenant, easement or servitude in respect of ecologically sensitive land) is deemed to be the amount determined by the Minister of the Environment. Paragraph 110.1(5)(b) provides that the amount so determined in respect of a covenant, easement or servitude will not be considered to be less than the decrease in value of the subject land that resulted from the making of the gift.

Paragraph 110.1(5)(b) is amended to clarify its application to “real servitudes” under the Civil Code of Quebec.

This amendment applies to gifts made after December 20, 2002.”

...

Clause 248

Charitable Donations Tax Credit

ITA
118.1

Section 118.1 of the Act provides for a charitable donations tax credit to individuals in respect of gifts made to qualified donees. Section 118.1 is amended to expand the entities referred to in this section to include municipal or public bodies performing a function of government in Canada. This amendment is in response to the Quebec Court of Appeal decision in Tawich Development Corporation v. Deputy Minister of Revenue of Quebec, 2001 D.T.C. 5144. For additional information, see the commentary to paragraph 149(1)(d.5).

The amendments to section 118.1, described below, are made consequential to the addition of new subsections 248(30) to (39) of the Act. Generally, those subsections clarify the circumstances under which a transfer of property will be considered a gift notwithstanding that the donor may be entitled to receive an advantage or benefit in respect of the property. New subsection 248(31) generally provides that the “eligible amount” of the gift is the excess of the fair market value of a property transferred by way of gift over the value of the advantage or benefit, if any, to which the transferor is entitled. For additional information, see the commentary to new subsections 248(30) to (39).

Definitions

ITA
118.1(1)

Subsection 118.1(1) of the Act provides definitions of the terms “total charitable gifts”, “total Crown gifts”, “total cultural gifts” and “total ecological gifts”. These definitions apply for the purpose of the tax credit available under subsection 118.1(3) of the Act to individuals who make such gifts. The amount of a gift that is eligible for a tax credit is, generally, the fair market value of the property disposed of by the individual in the making of the gift.

The definitions “total charitable gifts”, “total Crown gifts”, “total cultural gifts” and “total ecological gifts” in subsection 118.1(1) are amended, as a consequence of the addition of new subsection 248(31) of the Act, to provide that the amount that qualifies for the credit under subsection 118.1(3) is the “eligible amount” of a gift.

In addition, the definition of “total ecological gifts” in subsection 118.1(1) is expanded to include a gift to a municipal or public body performing a function of government in Canada.

The definition “total ecological gifts” is also amended to clarify its application to “real servitudes” under the Civil Code of Quebec.

Variable B in the formula in the definition of “total gifts” in subsection 118.1(1) generally provides that 100% of a taxable capital gain that results from a gift is included in the annual income limit that applies to gifts. This is an enhancement of the 75% income limit that generally applies to other types of income. Variable B is amended as a consequence of the addition of new subsection 248(31) of the Act, to ensure that the enhanced income limit only applies to the portion of a taxable capital gain that relates to the eligible amount of a gift.

The amendments to subsection 118.1(1) apply in respect of gifts made after December 20, 2002, except that paragraph (a) of the definition “total ecological gifts” in subsection 118.1(1) is amended for gifts made after May 8, 2000 and before December 21, 2002 to add a reference to municipal or public bodies performing a function of government in Canada.

Proof of Gift

ITA
118.1(2)

Subsection 118.1(2) of the Act provides that an amount in respect of a gift by an individual may not be included in the amount eligible for a tax credit under subsection 118.1(3) unless the gift is evidenced by a receipt containing prescribed information. Subsection 118.1(2) is amended concurrently with subsection 118.1(1), to refer to the “eligible amount” of a gift.

It is proposed that subsections 3501(1), (1.1) and (6) of the Regulations be amended to provide that every official receipt issued by a registered organization in respect of a gift contain, in addition to the information already prescribed, the amount of the advantage, if any, and the eligible amount of the gift.

For additional details, see the commentary to new subsections 248(31) and (32) of the Act regarding the eligible amount and the amount of the advantage in respect of a gift.

The amendments to subsection 118.1(2) of the Act and subsections 3501(1), (1.1) and (6) of the Regulations are to be effective in respect of gifts made after December 20, 2002.

Gift of Capital Property

ITA
118.1(5.4) and (6)

Subsection 118.1(6) of the Act provides that, if an individual donates capital property to a charity, the individual may designate a value between the adjusted cost base and the fair market value of the donated property to be treated both as the proceeds of disposition for the purpose of calculating the individual’s capital gain and the amount of the gift for the purpose of calculating the tax credit allowed for charitable donations under subsection 118.1(3) of the Act.

Subsection 118.1(6) is restructured as new subsection 118.1(5.4) and revised subsection 118.1(6). New subsection 118.1(5.4) describes the circumstances under which amended subsection 118.1(6), which remain generally unchanged, will apply. However, where the property is depreciable property, subsection 118.1(5.4) includes those situations where the actual value of the gifted property is between the undepreciated capital cost of that class at the end of the taxation year of the individual and the fair market value of the gifted property.

Amended subsection 118.1(6) provides for the amount that may be designated by the individual. As with the former provision, the amount designated is deemed to be the individual’s proceeds of disposition of the gift. The provision also continues to provide that the amount designated is treated as the fair market value of the property transferred by way of gift. However, under the amended version, this is for the purpose of new subsection 248(31) of the Act (changed from subsection 118.1(1) of the Act). New subsection 248(31) generally provides that the “eligible amount” of the gift is the excess of the fair market value of a property transferred by way of gift over the value of the advantage or benefit, if any, to which the transferor is entitled. The “eligible amount” is relevant to the determination of the tax credit deductible by the individual under subsection 118.1(3).

Finally, amended subsection 118.1(6) effectively allows an individual to reduce the amount of recaptured depreciation that might otherwise be calculated in respect of a gift of depreciable property, with a corresponding reduction to the eligible amount deductible in respect of the gift under subsection 118.1(6). However, the designated amount may not be lower than the amount of any actual proceeds of disposition in respect of the property (or, more specifically, the amount of the advantage in respect of the gift, as defined under new subsection 248(32) of the Act).

In particular, the amount designated by the individual in respect of the property transferred may not exceed the fair market value of the property otherwise determined, and may not be less than the greater of
•the amount of the advantage, if any, in respect of the gift, and
•the adjusted cost base of the property or, if the property is depreciable property of the individual, the undepreciated capital cost of the class of the property at the end of the individual’s taxation year (determined without reference to the proceeds of disposition designated in respect of the property).

Subsections 118.1(5.4) and (6) (as amended) generally apply in respect of gifts made after 1999. For additional details regarding the eligible amount and the amount of the advantage in respect of a gift, see the commentary to new subsections 248(31) and (32).


Example

Mr. Adams transfers a rental property with a fair market value of $200,000 to a registered charity, in exchange for proceeds of disposition of $95,000. The original cost to Mr. Adams when he purchased the property in 1985 was $65,000. The rental property is the only depreciable property in its class, with an undepreciated capital cost balance before the transfer of $45,000.

Assuming that the transfer qualifies as a gift (see the commentary to subsections 248(30) to (32)), Mr. Adams may designate any amount between $95,000 and $200,000 as the proceeds of disposition for the gift. Mr. Adams could have designated an amount as low $45,000, if he had received a lesser amount in actual proceeds from the charity.

Mr. Adams decides to designate $150,000 as its proceeds of disposition. The taxable gain to Mr. Adams on the transfer can therefore be allocated as follows:

Allocation of Taxable Gain

Subtotal

Total

 

Designated proceeds

$150,000

 

Adjusted cost base (original cost)

65,000

65,000

 

Capital Gain

85,000

 

Taxable Capital Gain

42,500

 

Undepreciated Capital Cost

45,000

 

Recaptured depreciation

20,000

 

Total Income Inclusion

$ 62,500


The eligible amount of the gift is calculated as follows:

 



Total

 

Designated proceeds

$150,000

 

Amount of advantage (consideration)

95,000

 

Eligible amount of the gift

55,000


Gifts of Art

ITA
118.1(7)(d) and 118.1(7.1)(d)

Subsection 118.1(7) of the Act provides that, if an artist donates artwork created by the artist and held in the artist’s inventory, the artist may designate a value between the cost amount and the fair market value of the artwork to be treated both as the proceeds of disposition for the purpose of calculating the artist’s income and the amount of the gift for the purpose of calculating the tax credit allowed for charitable donations under subsection 118.1(3) of the Act.

If the artwork is certified as a cultural gift, as described in subsection 118.1(1) of the Act, subsection 118.1(7.1) of the Act applies instead of subsection 118.1(7). Under subsection 118.1(7.1), the artist is treated as having received proceeds of disposition equal to the cost amount to the artist of the work of art for the purpose of calculating the artist’s income, but the fair market value of the artwork is not affected. This means that the artist is entitled to a credit based on the value of the donation, but that the artist recognizes neither a profit nor a loss on the disposition of the work of art in computing income from a business for income tax purposes.

Paragraphs 118.1(7)(d) and (7.1)(d) are amended consequential to the addition of subsections 248(31) and (32) of the Act. Amended paragraph 118.1(7.1)(d) generally provides that the artist’s proceeds of disposition from a gift of cultural property that was created by the artist and held as inventory may not be lower than the amount of any actual proceeds of disposition in respect of the property (or, more specifically, the amount of the advantage in respect of the gift, as defined under new subsection 248(32)). In particular, the amount that may be designated by the artist must be the greater of the cost amount of the work of art and the amount of the advantage in respect of the gift. As a result, the artist will have business income from the disposition if the amount of the advantage in respect of the gift exceeds the cost amount to the artist of the work of art.

For gifts from an artist’s inventory that are not certified cultural property, amended paragraph 118.1(7)(d) provides that the amount designated in the artist’s return of income is deemed to be the artist’s proceeds of disposition. The provision also continues to provide that the amount designated is treated as the fair market value of the property transferred by way of gift. However, under the amended version, this is for the purpose of new subsection 248(31) (changed from subsection 118.1(1)). New subsection 248(31) generally provides that the “eligible amount” of the gift is the excess of the fair market value of a property transferred by way of gift over the value of the advantage or benefit, if any, to which the transferor is entitled. The “eligible amount” is relevant to the determination of the tax credit deductible by the individual under subsection 118.1(3).

The amount designated in the artist’s return of income in respect of the property transferred may not exceed the fair market value of the property otherwise determined, and may not be less than the greater of
•the amount of the advantage, if any, in respect of the gift, and
•the cost amount to the artist of the work of art.

As a result, the artist will have business income from the disposition to the extent that the amount of the advantage in respect of the gift (or some other amount designated in the artist’s return of income, if greater) exceeds the cost amount to the artist of the work of art.

For additional details regarding the eligible amount and the amount of the advantage in respect of a gift, see the commentary to new subsections 248(31) and (32) of the Act.

The amendments to paragraphs 118.1(7)(d) and (7.1)(d) apply in respect of gifts made after December 20, 2002.

Gifts Made by Partnership

ITA
118.1(8)

Subsection 118.1(8) of the Act allows the attribution of gifts made by a partnership to its individual members, according to each member’s share in the partnership. Subsection 118.1(8) is amended consequential to the addition of new subsection 248(31) of the Act, to refer to the “eligible amount” of a gift made because of an individual’s membership in a partnership.

The amendment applies in respect of gifts made by a partnership after December 20, 2002.

Non-qualifying Securities

ITA
118.1(13)(b) and (c)

Subsection 118.1(13) of the Act provides that, if an individual makes a gift of a “non-qualifying security” (defined in subsection 118.1(18) of the Act), that gift will be ignored for the purpose of the charitable donations tax credit.

Paragraphs 118.1(13)(b) and (c) concern the amount to be included in a taxpayer’s “total charitable gifts” or “total Crown gifts” (defined in subsection 118.1(1) of the Act) for the taxation year in which a security ceases to be a “non-qualifying security” or the donee disposes of a non-qualifying security. If either of these events occurs within five years of the actual donation of the non-qualifying security by a taxpayer, the taxpayer will be treated as having made a gift at that later time. The fair market value of this deemed gift is considered to be the lesser of two amounts. The first amount is the fair market value of the security at the time that it was actually donated. (Note that this amount may have been designated by the taxpayer as a lower amount than the actual fair market value if an election were made under subsection 118.1(6) of the Act for the taxation year of the actual donation.) The second amount is
•if the security ceased at the later time to be a non-qualifying security, the fair market value of the security at that later time, or
•if the security was disposed of by the donee at that later time, the fair market value of the consideration received by the donee.

Amendments to paragraphs 118.1(13)(b) and (c) are to provide language complementary to the amendment of the definitions “total charitable gifts” and “total Crown gifts” in subsection 118.1(1). The amendments apply to gifts actually made after December 20, 2002.

...

Clause 308

Charities

ITA
149.1

Section 149.1 of the Act provides the rules that must be met for charities to obtain and keep registered status. A registered charity is exempt from tax on its taxable income and can issue receipts which entitle its donors to claim tax relief for their donations.

Definitions

ITA
149.1(1)

Subsection 149.1(1) of the Act contains definitions that are relevant for the purposes of section 149.1.

“charitable organization”

The definition “charitable organization” provides that more than 50% of the directors, trustees, officers or similar officials of a charitable organization must deal with each other and with each of the other directors, trustees, officers or similar officials at arm’s length.

For a charity that has applied for registration after February 15, 1984 and which has been designated as a private or public foundation, the definition “charitable organization” also requires that not more than 50% of the charity’s capital be contributed by a person or group of persons not dealing with each other at arm’s length. This definition is amended to replace the “contribution” test with a “control” test. As a result, a charity will not be disqualified from being treated as a charitable organization solely because a person, or a group of persons not dealing with each other at arm’s length, has contributed more than 50% of the charity’s capital. However, such a person or group is not permitted to control the charity in any way, nor may the person or the members of the group represent more than 50% of the directors, trustees, officers and similar officials of the charity.

This amendment generally applies after 1999.

“disbursement quota”

The “disbursement quota” for a taxation year of a charitable foundation or organization is defined in subsection 149.1(1) of the Act for the purpose of determining the amount that the charity is required to spend on charitable activities or gifts to other charities. The implementing legislation of Budget 2010 reformed the disbursement quota such that it no longer refers to the eligible amount of a gift for which a receipt has been issued, applicable generally to taxation years that on or after March 4, 2010.

However, consequential to the addition of new subsection 248(31) of the Act, the definition “disbursement quota” is to be read, in respect of gifts made after December 20, 2002 and in a taxation year that begins before March 23, 2004, so as to provide that the amount of a gift for which a tax receipt is issued refers to the “eligible amount” of the gift. For additional information, see the commentary to new subsection 248(31).

“enduring property”

The definition “enduring property” was repealed in legislation implementing Budget 2010. However, the application of the English version of the definition for taxation years that begin after March 22, 2004 and before March 4, 2010, is amended to correct a cross-reference in its paragraph (d).

“public foundation”

The definition “public foundation” provides that more than 50% of the directors, trustees, officers or similar officials of a public foundation must deal with each other and with each of the other directors, trustees, officers or similar officials at arm’s length.

This definition requires that not more than 50% (75% in some cases) of the foundation’s capital can be contributed by a person or group of persons not dealing with each together at arm’s length. The “contribution” test in the definition is replaced by a “control” test. As a result, a foundation will not be disqualified from being treated as a public foundation solely because a person, or a group of persons not dealing with each other at arm’s length, has contributed more than 50% of the foundation’s capital. However, such a person or group is not permitted to control the foundation in any way, nor may the person or the members of the group represent more than 50% of the directors, trustees, officers and similar officials of the foundation.

This amendment generally applies after 1999.

Revocation of Registration

ITA
149.1(2), (3) and (4)

Subsections 149.1(2), (3) and (4) of the Act set out the reasons for which the Minister of National Revenue may revoke the registration of a charitable organization, a public foundation and a private foundation, respectively. These subsections are amended to permit the revocation of the registration of such entities if they make gifts (other than gifts made in the course of their charitable activities) to persons or entities that are not qualified donees. A “qualified donee” is essentially a person or entity to which a tax deductible or tax creditable donation may be made.

These amendments apply to gifts made after December 20, 2002.

Accumulation of Property

ITA
149.1(9)

Subsection 149.1(9) was repealed in legislation implementing Budget 2010. However, the application of subsection 149.1(9) in respect of gifts made after December 20, 2002 and in taxation years that end before March 4, 2010, is amended consequential to the addition of new subsection 248(31) of the Act to provide that the amount of a gift for which a tax receipt is issued refers to the “eligible amount” of a gift. For additional information, see the commentary to new subsection 248(31).

...

Clause 328

Revocation Tax

ITA
188(1)

Subsection 188(1) of the Act imposes a tax payable by a registered charity in respect of the revocation of the charity’s registration. The tax is generally equal to the total of the value of the assets of the charity plus the amount of receipted donations and inter-charity gifts received by the charity after the “valuation day” of the charity’s assets, net of certain eligible disbursements.

Subsection 188(1) is amended consequential to the addition of new subsection 248(31) of the Act, in respect of gifts made after December 20, 2002, to refer to the “eligible amount” of a gift for which a receipt was issued by the charity. For additional information, see the commentary to new subsection 248(31).

...

Clause 340

Tax Payable by Recipient of an Ecological Gift

ITA
207.31

Section 207.31 of the Act imposes a tax on charities and Canadian municipalities where, without the approval of the Minister of the Environment, they dispose of or change the use of property donated to them as an ecological gift. The tax is equal to 50% of the amount that is the fair market value of the property at the time of the disposition or change in use as determined for the purposes of section 110.1 or 118.1 of the Act.

Section 207.31 is amended, in respect of dispositions of or changes of use of property after July 18, 2005, to clarify that it also applies to a municipal or public body performing a function of government in Canada. For more information, refer to the commentary for subsection 118.1(1) and paragraph 149(1)(d.5).

...

Clause 352

Records and Books

ITA
230(2)

Subsection 230(2) of the Act requires that registered charities and registered Canadian amateur athletic associations keep books and records containing information that will enable the Minister of National Revenue to determine whether there are grounds for the revocation of their registration.

The French version of this subsection is amended to replace the expression « motifs d’annulation » by the expression « motifs de révocation » in order to be consistent with the terminology used in sections 149.1 and 168 of the Act, which authorize the Minister to revoke the registration of these charities and associations.

This amendment applies on Royal Assent.

ITA
230(3)

Subsection 230(3) provides that where a person has failed to keep adequate records and books of account, the Minister of National Revenue may require them to keep such records and books as the Minister specifies. The French version of this subsection is amended to correct grammatical errors.

This amendment applies on Royal Assent.

,,,

Gifts and Contributions

ITA
248(30) to (41)

At common law, it is generally the view that a gift includes only a property transferred voluntarily, without any contractual obligation and with no advantage of a material character returned to the transferor.

In contrast, under section 1806 of the Civil Code of Quebec (“CCQ”), a gift in Quebec is a contract by which ownership of property is transferred by gratuitous title. However, it may be possible for a transferor to transfer property, partly by gratuitous title, without any material advantage returned (as a gift) and partly by onerous title (for consideration). It is therefore possible, in Quebec, to sell a property to a charity at a price below fair market value, resulting in a gift of the difference.

Under both the common law and the CCQ, it is generally accepted that a transfer of property is not a gift unless the donor is impoverished by the transfer to the benefit of the donee and it is the donor’s intention to enrich the donee without consideration.

At common law the presence of a consideration of any value whatsoever makes a gift impossible. As such, at common law a contract to dispose of a property to a charity at a price below fair market value would not generally be considered to include a gift.

Nevertheless, there have been certain decisions made under the common law where it has been found that a transfer of property to a charity was made partly in consideration for services and partly as a gift.

Subsections 248(30), (31) and (32) are added to the Act to clarify the circumstances under which taxpayers and donees may be eligible for tax benefits available under the Act in respect of the impoverishment of a taxpayer in favour of a donee. In addition to the clarification provided by these new rules, on December 24, 2002, the Canada Revenue Agency released guidelines (Income Tax Technical News No. 26) that describe how it will apply the new rules to various situations and fundraising methods commonly used in the charitable sector. Subsection 248(34) provides technical rules regarding the repayment of debt that previously reduced the eligible amount of a gift. Subsections 248(35) to (39) provide technical rules, regarding the eligible amount of a gift or the value of property transferred and benefits receivable, that apply in calculating the eligible amount of a gift or political contribution. New subsection (40) provides that the rule in subsection 248(30) does not generally apply to inter-charity transfers. New subsection (41) deems the eligible amount of a gift to be nil if a donor fails to provide that information.

In general, these provisions are intended to reflect the policy that the amount eligible for an income tax benefit to a donor, by way of a charitable donation deduction or credit or a political contributions tax credit, should reflect the economic impact on the donor (before considering the income tax benefit) of the gift or contribution.

Intention to Give

ITA
248(30)

For the transfer of property to qualify as a gift, it is necessary that the transfer be voluntary and with the intention to make a gift. At common law, where the transferor of the property has received any form of consideration or benefit, it is generally presumed that such an intention is not present. New subsection 248(30) of the Act, which applies in respect of transfers of property after December 20, 2002 to qualified donees (such as registered charities), allows the opportunity to rebut this presumption. New paragraph 248(30)(a) provides that the existence of an amount of an advantage to the transferor will not necessarily disqualify the transfer from being a gift if the amount of the advantage does not exceed 80% of the fair market value of the transferred property.


Example

Mr. Short transfers land and a building with a fair market value of $300,000 to a registered charity. The charity assumes liability for an outstanding $100,000 mortgage on the property. The assumption of the mortgage by the charity does not necessarily disqualify the transfer from being a gift for the purposes of the Act.

If the value of the mortgage is equal to the outstanding amount (e.g., the interest rate and terms and conditions are representative of current market conditions), the eligible amount of the gift, in respect of which Mr. Short may be entitled to a tax credit under subsection 118.1(3), is $200,000.

If the amount of an advantage in respect of a transfer of property exceeds 80% of the fair market value of the transferred property, new paragraph 248(30)(b) provides that the transfer will not necessarily be disqualified from being a gift if the transferor can establish to the satisfaction of the Minister of National Revenue that the transfer was made with the intention to make a gift.

In the above example, if the amount of the mortgage outstanding had been greater than $240,000, Mr. Short (or the charity on Mr. Short’s behalf) could apply to the Minister of National Revenue for a determination as to whether the transfer was made with the intention to make a gift.

It is generally accepted that the tax benefit available to a taxpayer, by way of a charitable donation deduction or credit, is not considered an advantage or benefit that would reflect a lack of donative intent on the part of a taxpayer. However, there may be circumstances where the intention of a taxpayer to make a gift is in doubt because of the combination of tax and other benefits to the taxpayer. If the primary motivation of a taxpayer for entering into a transaction or series of transactions is to return a profit to the taxpayer by way of a combination of tax and other benefits, the taxpayer may not be impoverished by the transfer of a property to a charity. Subsection 248(30) is not intended to allow a taxpayer to profit by the making of a gift.

Eligible Amount of Gift or Monetary Contribution

ITA
248(31)

New subsection 248(31) of the Act, which applies in respect of gifts and political contributions made after December 20, 2002, defines the eligible amount of a gift or contribution as the amount by which the fair market value of the property that is the subject of the gift or contribution exceeds the amount of the advantage, if any, in respect of the gift or contribution. Subsection 248(31) is added concurrently with amendments to subsections 110.1(1) and 118.1(1) of the Act, which describe the types of gifts in respect of which an eligible amount will qualify for a deduction (for corporations) or a tax credit (for individuals). The amount of the advantage in respect of a gift or contribution is described in new subsection 248(32) of the Act.

Amount of Advantage

ITA
248(32)

New subsection 248(32), which generally applies in respect of gifts or political contributions made after December 20, 2002, describes the amount of an advantage in respect of a gift or contribution as, in general, the total value of all property, services, compensation or other benefits to which the donor of a property is entitled.

Subsection 248(32) is added concurrently with the addition of subsection 248(31) of the Act, which defines the eligible amount of a gift or contribution, and with the amendment of subsection 127(3) of the Act in respect of contributions to a political party. The amount of an advantage reduces the eligible amount of a gift or contribution.

In general, new subsection 248(32) is intended to apply in respect of any transaction or series of transactions having either the purpose or the effect of reducing the economic impact to a donor of a gift or contribution. This includes, for instance, situations where a charity invests funds or acquires property in a manner that benefits the donor. The reduction to an eligible amount also includes an advantage that is partial consideration for, or in gratitude for, the gift or contribution, or is in any way related to the gift or contribution. An example would include the option of a donor to satisfy or pay a loan by assigning or transferring to another person a property (including the rights under an insurance policy) that has less economic value than the amount of loan outstanding. Another example would include an assumption of a donor’s risk by a charity, where the acquisition, directly or indirectly, of an interest in a property of the donor by the charity may have the effect of reducing the potential loss of the donor from that investment. (However, a tax credit or deduction resulting from a charitable donation is not considered a benefit.)

An advantage may exist even though it is not received at the time of the gift or contribution. For example, it may have been received prior to the time of the gift or may be contingent or receivable in the future. The advantage may accrue either to the donor or to a person not dealing at arm’s length with the donor. It is not necessary that the advantage be receivable from the donee.

Paragraph 248(32)(b) includes as an advantage any limited-recourse debt in respect of the gift or contribution. For additional details regarding limited-recourse debt, see the commentary to new subsection 143.2(6.1) of the Act.

Cost of Property Acquired by Donor

ITA
248(33)

New subsection 248(33) of the Act, which applies in respect of gifts or political contributions made after December 20, 2002, provides that the cost to a taxpayer of property acquired by the taxpayer in the course of the making of a gift or contribution by the taxpayer is the fair market value of the property at the time of the making of the gift or contribution. The fair market value of such a property is relevant in computing the amount of the advantage in respect of the gift or contribution under subsection 248(32).

Repayment of Limited Recourse Debt

ITA
248(34)

New subsection 248(34) of the Act, which applies in respect of gifts or political contributions made after February 18, 2003, generally provides that a repayment of the principal amount of a limited-recourse debt in respect of a gift or political contribution is deemed to be a gift in the year it is paid. However, in some circumstances the total amount of limited-recourse debt and other advantages to the donor may exceed the fair market value of the property transferred to a charity, resulting in no eligible amount to the donor under subsection 248(31) of the Act. In this case, the donor must pay off the excess amount before any amount will be allowed as a gift. Also, a payment financed by other limited-recourse debt or made by way of assignment or transfer of a guarantee, security or similar indemnity or covenant is not recognized for these purposes. For example, the assumption of a taxpayer’s limited-recourse debt by another person, in exchange for an insurance policy in favour of the taxpayer that guarantees a particular rate of return on an investment held by any person, would not qualify as a deemed gift under subsection 248(34).

Deemed Fair Market Value

ITA
248(35)

New subsection 248(35) of the Act, which applies in respect of gifts made after 6:00 p.m. (EST), December 5, 2003, provides that the fair market value of a property that is the subject of a gift is, for the purposes of determining the eligible amount of a gift under subsection 248(31), deemed to be the lesser of the actual fair market value of the property and its cost to the donor. This rule applies if the property was acquired by the donor as part of a gifting arrangement that is a tax shelter. For more information on gifting arrangements, refer to the commentary for subsection 237.1(1) of the Act.

Unless the donation is made as a consequence of the donor’s death, this rule also applies if the property was acquired
•less than three years before the time of donation, or
•less than 10 years before that time, if one of the main purposes of acquisition was to gift the property to a qualified donee.

Non-arm’s Length Transactions

ITA
248(36)

New subsection 248(36) of the Act applies in conjunction with subsection 248(35), to “look-back” to discern whether a donated property was previously acquired by a person dealing non-arm’s length with the donor. If subsection 248(35) applies because the donor acquired the property within the three years of donation, then if a non-arm’s length person owned that property within that three-year period, the value of the gift to the donor will be the lower of the taxpayer’s cost and the lowest cost to any such non-arm’s length person.

Similarly, the rule will apply if subsection (35) applies because the taxpayer acquired the property within the last ten years and one of the main reasons of the acquisition was to gift the property, if a non-arm’s length person acquired that property within that ten-year period.

Subsection 248(36) applies to gifts made on or after July 18, 2005.

Non-application of Subsection (35)

ITA
248(37)

New subsection 248(37) of the Act provides exceptions to the application of subsection 248(35) of the Act where the property that is the subject of a gift is an ecological gift, inventory, real property situated in Canada, publicly-traded securities or cultural property, the value of which is certified by the Cultural Property Export Review Board.

In some circumstances, a shareholder might transfer a property to a controlled corporation in exchange for shares issued by the corporation, and then donate the shares. Alternatively, the corporation might donate the property it received. If subsection 248(35) would not have applied to a gift of a property by a shareholder, either because it is a type of property referred to above or because subsection 248(35) would not apply to the shareholder in any event, and if the shareholder donates the share, subsection 248(37) will further exempt the share from the application of subsection 248(35). If subsections 85(1) or 85(2) of the Act applied to the transfer of such an exempt property to the corporation, then subsection 248(37) will preclude the application of subsection 248(35) to that property if it is then donated by the corporation.

Similarly, sometimes a donor will make a gift of a property that was acquired in circumstances where subsection 70(6) or (9) or 73(1), (3) or (4) of the Act applied. In such a case, the donor has acquired the property from a transferor (such as a spouse) on a tax-deferred “rollover” basis. Unless the transferor acquired the property within the 3-year period referred to in subsection 248(35) (or the 10-year period, if applicable), subsection 248(37) provides that subsection 248(35) will not apply in these circumstances to deem the value of the gift to be the donor’s rollover cost or adjusted cost base.

Artificial Transactions

ITA
248(38)

New subsection 248(38) of the Act applies in respect of gifts made after 6:00 p.m. (EST), December 5, 2003, to prevent a donor from avoiding the application of subsection 248(35) by disposing and reacquiring a property before donating it to a qualified donee. If this is the purpose of any transaction or series of transactions that includes a disposition or acquisition of a property, for such gifts made before July 18, 2005, the cost of the property to the donor for the purpose of subsection 248(35) is deemed to be the lowest cost incurred by the taxpayer at any time to acquire that property or an identical property.

For gifts made on or after July 18, 2005, the eligible amount is deemed to be nil if a transaction or series of transactions
•has, as one of its purposes, the avoidance of the application of subsection 248(35), or
•would otherwise result in a tax benefit to which the General Anti-Avoidance Rule in subsection 245(2) would otherwise apply.

For example, the eligible amount of a gift resulting from a transaction or series to which subsection 248(38) would apply, if the gift were made before July 18, 2005, would be deemed to be nil if instead the gift were made on or on or after July 18, 2005.

The objectives of the provisions in the Act related to gifting are generally described above under the heading “Gifts and Contributions”, but are not limited to that description.

Substantive Gift

ITA
248(39)

New subsection 248(39) of the Act, which applies in respect of gifts made after February 26, 2004, prevents a donor from avoiding the application of subsection 248(35) by disposing a property (the “substantive gift”) to a qualified donee and donating the proceeds, rather than donating the property itself. The provision applies similarly in respect of political contributions. The fair market value of the gift or contribution of the proceeds, for the purpose of determining its eligible amount under subsection 248(31), is deemed to be the lesser of the fair market value of the property sold and its cost. Subsection 248(39) does not apply if subsection 248(35) would not have applied to a gift by the taxpayer of that property.

Reasonable Inquiry

ITA
248(40)

The July 18, 2005 proposal in respect of subsection 248(40) of the Act has been removed and replaced with an unrelated amendment.

Inter-charity gifts

ITA
248(40)

New subsection 248(30) of the Act allows the opportunity for a donor to rebut the general presumption that the receipt of any form of consideration or benefit reflects that lack of an intention to make a gift. Such a rule is unnecessary in the context of inter-charity transfers and could lead to complication of the “disbursement quota” calculation of a charity under section 149.1 of the Act. New subsection 248(40) therefore precludes the application of subsection 248(30) to transfers made by a registered charity to a qualified donee. Consequently, the eligible amount of a gift under new subsection 248(31) should always equal its fair market value.

New subsection 248(40) of the Act applies in respect of transfers made on or after November 9, 2006.

Information Not Provided

ITA
248(41)

New subsection 248(41) of the Act, which applies in respect of gifts and monetary contributions made after 2005, provides that the eligible amount of a gift is nil if, before an official charitable receipt is issued by a donee, the donor fails to inform the donee of information that would be relevant to the application of subsections 248(31), (35), (36), (38) or (39) of the Act. The donee requires such information for correct preparation of the receipt.

...

Clause 393

Gifts

ITR
3501

Section 3501 of the Regulations is amended to refer to “gift” instead of “donation” and to provide that every official receipt issued by a registered organization in respect of a gift contain, in addition to the information already prescribed, a description and the amount of an advantage, if any, and the eligible amount of a gift. For information on the amount of an advantage and the eligible amount of a gift, refer to the commentary for subsections 248(31) and (32) of the Act.

These amendments generally apply in respect of gifts made after December 20, 2002.”

Do you require legal advice with respect to Canadian or Ontario non-profits or charities?

Contact

Charity Lawyer Mark Blumberg

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.

mark@blumbergs.ca
416.361.1982
Download vCard

Connect

Locate

Blumberg Segal LLP
Barristers & Solicitors
#1202 - 390 Bay Street
Toronto, Ontario
M5H 2Y2 Canada

Charity Law List

Join Blumbergs' non-profit and charities newsletter
View recent issue: December 2014