The 2015 Budget announces proposed changes to the Income Tax Act to allow registered charities (i.e. charitable organizations, public foundations, and private foundations) and registered Canadian amateur athletic associations (RCAAAs) to invest in limited partnerships.
What’s Changing?
Charities have, up to now, been mostly blocked from investing in limited partnerships by the ‘related business’ rules in the Income Tax Act. These rules state that charitable organizations, public foundations, and RCAAAs are not allowed to engage in business unless it is related to their purposes (i.e. not solely for investment purposes), while private foundations are not allowed to engage in business of any sort. Unlike a corporation, where the shareholders are not deemed to be carrying on its business, partners are legally deemed to be carrying on the business of a partnership. Thus, most charities and all private foundations have been excluded from holding partnership interests. Doing so has been grounds for the revocation of their charitable registration.
The proposed change to the Act makes it so that, for registered charities and RCAAAs, merely holding an interest as a member of a partnership does not count as carrying on business. In practical terms, this not only removes all the ‘related business’ barriers for charities that currently hold an interest in a limited partnership or may want to acquire one, it also allows private foundations to get involved in this kind of investment for the first time ever.
The change will apply to all investments in limited partnerships made or acquired on or after April 21, 2015.
The Fine Print
The proposed change only applies when the charity/RCAAA is a member of the partnership under the following conditions:
- by operation of any law governing the arrangement in respect of the partnership, the liability of the member as a member of the partnership is limited;
- the member deals at arm’s length with each general partner of the partnership; and
- the member, or the member together with persons and partnerships with which it does not deal at arm’s length, holds interests in the partnership that have a fair market value of not more than 20% of the fair market value of the interests of all members in the partnership.
The change also does not apply where a charity/RCAAA carries on a related business through a limited partnership. In that case, it will still bound by the related business rules.
Some other small changes will be made to the law to accommodate this new provision. Notably, the excess corporate holding rules that limit shareholdings by private foundations will be amended so that they do not catch limited partnerships. Donations of interests in limited partnerships will be subject to the same rules regarding non-qualifying securities and loanbacks that currently apply to donations of shares.
Potential Impact
On the government’s part, this proposal is estimated to reduce federal revenues “by a small amount” every year (no figures are given on the budgetary balance sheet, which is rounded to the million). For charities, however, the impact will likely be significant.
Partnerships are increasingly popular investment vehicles for pooling the money of large investors. Charities will also be able take the initiative to produce new partnership vehicles to structure investments that will help them reach their charitable aims, and to receive donations of limited partnership units. They will also, of course, have more options for diversifying their investment portfolios. In short, the measure will give charities access to a significant investment market from which they have been almost entirely shut out.