Finance Explanatory Notes on Charity provisions in Income Tax Act

September 10, 2010 | By: .(JavaScript must be enabled to view this email address) Mark Blumberg
Topics: News, Canadian Charity Law

Finance has released “Explanatory Notes in Respect of Legislative Proposals Relating to the Income Tax Act and Related Acts and Regulations”.  Beginning on page 189 it has information on changes relating to charities which are reproduced here.

Clause 90
Charities
ITA

149.1
Section 149.1 of the Act provides the rules that must be met for charities to obtain and keep registered charity status.

Definitions
ITA 149.1(1)

“capital gains pool”, “enduring property” and “specified gift”
Consequential to the amendment of the definition “disbursement quota” in subsection 149.1(1) of the Act, the definitions “capital gains pool”, “enduring property” and “specified gift” in subsection 149.1(1) are repealed.

“disbursement quota”
The “disbursement quota” (DQ) for a taxation year of a charitable foundation or charitable organization is defined in subsection 149.1(1) of the Act for the purpose of determining the amount that the charity is required, under subsection 149.1(2), (3) or (4) of the Act, to spend in a taxation year on charitable activities or gifts to qualified donees. The formula for the amount of this expenditure requirement contains two general components:
- a requirement to spend a percentage of gifts received for which an official receipt was issued, including both transfers received from other charities and enduring property disposed that was received in earlier years (and generally excluded from the DQ at that time), but excluding up to the amount of the “capital gains pool” of the charity; and
- a requirement to spend a percentage of a prescribed amount of charity assets that were not used in charitable programs or administration, if the amount of such assets exceeds $25,000.

In general, a gift from one charity to another that is specified by the donor as a “specified gift” is not considered in the calculation of the DQ of the recipient charity. Such amounts are therefore precluded from satisfying the DQ expenditure requirement of the transferor charity.
Assets referred to in the second requirement are, generally, those owned by the charity at any time in the 24 months immediately preceding the taxation year, not including assets received from other charities during the year and “enduring property” disposed of in the year (as these excluded amounts are already considered in the first requirement). The “prescribed amount” is determined under section 3701 of the Income Tax Regulations.

The DQ definition is amended to eliminate the first requirement and to modify the second. Generally, the amended DQ will require that a charity spend annually 3.5 per cent of the prescribed amount of all assets owned by the charity at any time in the 24 months immediately preceding the taxation year that were not used in charitable programs or administration of the charity, but only if that amount exceeds $25,000 for charitable foundations and $100,000 for charitable organizations.

“designated gift”
The new definition “designated gift” in subsection 149.1(1) of the Act provides that a registered charity can designate, in its information return for a taxation year, a gift or a portion of a gift of property made in the year to another registered charity with which it does not deal at arm’s length.
This definition is introduced concurrently with the amendment of paragraph 149.1(1.1)(a) of the Act, such that a designated gift will not satisfy the donor’s disbursement quota expenditure requirements under subsection 149.1(2), (3) or (4) of the Act.
This definition also applies for the purpose of exempting a designated gift from the application of new paragraph 149.1(4.1)(d) and new subsection 188.1(12) of the Act to a charity that receives a gift from another charity with which it deals not at arm’s length. For more information see the commentary on those new provisions.

These amendments apply for taxation years that end on or after March 4, 2010.

Exclusions
ITA
149.1(1.1)
Subsection 149.1(1.1) of the Act excludes certain amounts from being included in determining if a registered charity has satisfied its disbursement quota for a year. In particular, this subsection provides that a “specified gift” from the charity to a qualified donee is precluded from satisfying the obligation of the donor charity under subsection 149.1(2), (3) or (4) of the Act, to expend an amount at least equal to its disbursement quota for the year.
Paragraph 149.1(1.1)(a) is amended to eliminate the reference to a “specified gift”. This amendment is consequential to the amendment of the definition “disbursement quota” and the concurrent repeal of the definition “specified gift” in subsection 149.1(1) of the Act.
In place of the reference to a specified gift is introduced a reference to a “designated gift”. Together with the amendment of subsections 149.1(1) and (4.1) of the Act, this reference will mean that a designated gift cannot be used to satisfy the donor charity’s disbursement quota. For more information, refer to the commentary for those subsections.
These amendments apply for taxation years that end on or after March 4, 2010.

Authority of Minister
ITA
149.1(1.2)
Subsection 149.1(1.2) of the Act provides that, for the purposes of determining the ¡§prescribed amount” of property of a charity that was not used in charitable programs or administration under section 3701 of the Income Tax Regulations (which applies in the calculation of a charity’s ¡§disbursement quota” under subsection 149.1(1) of the Act), the Minister of National Revenue may authorize a change of the number of periods chosen by a charity for the purposes of that calculation and may accept any method for the determination of the fair market value of a property.  Subsection 149.1(1.2) is amended consequential to the renumbering of the formula in the disbursement quota definition.
This amendment applies for taxation years that end on or after March 4, 2010.

Revocation of Registration of a Registered Charity
ITA
149.1(4.1)
Subsection 149.1(4.1) of the Act allows the Minister of National Revenue to revoke the registration of a charity in certain circumstances. Paragraph 149.1(4.1)(a) permits revocation in the case of an inter-charity gift if it can reasonably be considered that one of the main purposes of making the gift was to unduly delay the expenditure of amounts on charitable activities (as required, for example, under subsection 149.1(2), (3) or (4) of the Act).
Paragraph 149.1(4.1)(a) is amended to expand its application to any transaction, if it may be considered that a purpose of the transaction was to avoid or unduly delay the expenditure of amounts on charitable activities. These transactions may include a gift to another registered charity.
New paragraph 149.1(4.1)(d) may apply where an amount is transferred by way of gift between registered charities who do not deal at arm’s length, unless the donor charity has indicated in its annual information return that the gift is a ¡§designated gift”, as now defined in subsection 149.1(1) of the Act. Paragraph 149.1(4.1)(d) provides that the Minister may revoke the recipient charity’s registration if it does not spend, in the taxation year in which the gift was received or in the subsequent taxation year, the full amount transferred. That amount must be expended, in addition to the recipient charity’s disbursement quota for those two years, on its own charitable activities or by way of gifts to qualified donees with which it deals at arm’s length.
This amendment applies for taxation years that end on or after March 4, 2010.


Accumulation of Property
ITA
149.1(8) and (9)
Subsections 149.1(8) and (9) of the Act allow a registered charity, with the approval of the Minister of National Revenue, to accumulate property for a particular purpose, such that the amount accumulated will satisfy the charity’s disbursement quota as defined under subsection 149.1(1) of the Act. Subsection 149.1(9) of the Act provides that property so accumulated in a prior year, along with income earned from the property, is deemed to be a gift received that is included in determining the charity’s disbursement quota for the year after the expiration of a time period previously specified by the Minister, or an earlier time that the charity has decided not to use the property for the particular purpose.
Subsection 149.1(8) is amended and subsection 149.1(9) is repealed to reflect the changes to the ¡§disbursement quota” definition. In particular, subsection 149.1(8) is amended such that accumulated property and its related income are not to be included in the prescribed amount of all assets owned by the charity that were not used in charitable programs or administration, as long as the charity remains in compliance with the terms and conditions of the Minister’s approval.
Subsection 149.1(9) is repealed as gifts received by a charity are no longer relevant to the amended definition of disbursement quota.

These amendments apply for taxation years that end on or after March 4, 2010.

Income of a Charity
ITA
149.1(12)(b)(i)
Subparagraph 149.1(12)(b)(i) of the Act excludes ¡§specified gifts” from the calculation of the income of a charity. Subparagraph 149.1(12)(b)(i) is amended to change this reference to a ¡§designated gift”. For more information, refer to the commentary for the new definition ¡§designated gift” in subsection 149.1(1) of the Act.
This amendment applies for taxation years that end on or after March 4, 2010.

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