Budget 2008 – Measures for Charities
Adam Aptowitzer, February 26, 2008
Given that the 2006 and 2007 Conservative budgets had major implications for charities in Canada it is perhaps not surprising that the 2008 budget was rather muted in this respect (as in many others). Nevertheless, the Conservative government did take the opportunity to clean up some of the unforeseen problems associated with the charity initiatives in the first two budgets.
Donation of Public Securities
Prior to 2006, the donation of securities to registered charities was treated as any other disposition (i.e. there was tax on the disposition of the shares which was generally offset by the charitable tax receipt). In 2006, the Conservatives changed the law so that donations of public securities to ‘public’ charities no longer attracted capital gains tax on the donation. As a result, the donor had no tax consequences on the donation but still had the benefit of a tax receipt for the full value of the donation. In 2007, the government extended this benefit to those who donate publicly traded securities to private foundations so now it applies to donations of all publicly traded securities.
While the rule applies to a broad range of publicly traded securities (such as shares, debts, rights, mutual fund units and segregated fund units) on most of the world’s major exchanges it did not apply to securities which allowed the bearer to exchange that unlisted security for a publicly traded one. So, for example, the tax break would not apply to an individual who donates an unlisted security even if it entitles the owner to exchange the unlisted security for a listed one of the same company. Of course, the donor could exercise the option and donate the listed shares but from a tax perspective in these cases, the holder of the option has a taxable disposition of the option. Thus, even if the holder of the options were to donate the publicly traded shares to charity he or she would have to pay tax on the exercise of the option.
The 2008 budget deals with this by simply allowing that the donation of unlisted securities which can be converted into publicly traded ones to be donated tax free to any registered charity. The measure begins immediately. As the problem relating to employee stock options was dealt with in 2006 through the use of an offsetting deduction when the option was exercised and the shares donated to charity this new provision likely affects very few people.
Excess Business Holdings
When the Conservative government extended the tax break on the donation of publicly traded securities to private foundations it also instituted a new regime to ensure that these private foundations did not hold more than minor interests (less than 2% of a given class of shares is considered minor) in both publicly listed and unlisted securities. Moreover, the regime took into account the holdings of non arm’s-length entities in determining if the private foundation owned too much of the security in question.
Where a foundation and relevant non arm’s length people together own more than 20 per cent of a class, the foundation is required to divest itself of enough shares such that it meets the two per cent limit or it and relevant persons together do not exceed the 20 per cent limit. Transitional rules allow foundations to divest themselves, over a period of
five to 20 years, of excess corporate shares held on March 18, 2007. However, given that many of the shares in question are unlisted shares of private companies no ready market exists thus to comply with the law private foundations are forced to sell at a discount to comply with the law. Besides being economically undesirable this has the additional effect of causing the charity to potentially fall offside the disbursement quota rules.
No obligation to divest is imposed in respect of shares, known as “entrusted shares”, that were donated before March 19, 2007 and that are subject to a condition that they be retained by the foundation. The same provisions apply to any donation made on or after March 19, 2007 and before March 19, 2012 pursuant to the terms of a will signed, or an inter vivos trust settled before March 19, 2007 that included such a condition and was not amended after that date. However, entrusted shares are taken into account in determining the application of the excess corporate holdings regime to other shares of the same class.
This budget proposes to exempt from the divestiture rules unlisted shares that were held on March 18, 2007 (i.e. shares owned prior to the 2007 budget would be grandfathered – if they haven’t been sold already). Unlisted and listed shares donated after this date will continue to be subject to the transitional excess corporate holdings rules. The budget also introduces technical amendments dealing with entrusted shares and the substitution of shareholdings with new shareholdings, and proposes to extend an existing anti-avoidance rule in respect of the holding of an interest in a corporation via a trust.
Donation of Medicines
In the 2007 budget the government enacted a provision whereby Canadian companies which donate inventory of medications to certain charities were entitled to an additional deduction as a way to encourage the donation of these medications. Unfortunately, the deduction only applied if the donation was made to a charity which had received a disbursement under a program of the Canadian International Development Agency (CIDA) and the donation was made for use outside of Canada. Of course, this definition is fraught with difficulties in terms of both available information and timing. This was brought to the public’s acute attention in the Not for Profit News by noted tax author David Sherman who tried to obtain a list of qualifying charities from both CIDA and the CRA only for both to deny that they knew which charities qualified and that the other agency was responsible for maintaining the list.
Ostensibly to simply matters the new budget changes the qualifications for a charity to one where, in the opinion of the Minister responsible for CIDA, the charity meets a list of requirements prescribed from time to time by regulation to the Income Tax Act. The thrust of these regulations will be to ensure that eligible charities:
.act in a manner consistent with the principles and objectives of the World
Health Organization Guidelines for Drug Donations;
. have expertise in delivering medical donations to the developing world; and
. implement appropriate policies and practices with respect to the delivery of international development assistance.
As there is no indication that the list of charities which actually qualify will be made public it is hard to see how this change will simply Mr. Sherman’s (or the public’s) need to know
Mineral Exploration Tax Credit
Finally, of news to those who donate flow through shares to charity, the Mineral Exploration Tax Credit has been extended for an additional year. The credit is useful in that it increases the deduction allowed to holders of flow through shares (generally before it is donated to charity).