Budget 2014 – Sensible Tweaking of the System
By: Alexandra Tzannidakis
Technological Modernization of CRA’s Charities Directorate
The 2014 Budget proposes to help reduce the administrative burden on charities resulting from the Charities Directorate’s out-of-date, paper-based application and filing systems. $23 million will be invested in the CRA over 5 years to allow it to modernize these systems. Charities will eventually be able to file their annual information returns electronically, while aspiring charities will be able to apply for charitable registration this way as well. We hope that, beyond providing administrative relief, this move may also speed up the rate at which these services are provided.
This modernization will help bring charities administration into line with business and non-profit corporate administration, which already enjoys a full suite of electronic filing options. The Budget claims it will also help the CRA enhance the information it can make available online in terms of charitable giving trends and characteristics. Hopefully, the ‘public awareness’ this is intended to produce will be of a sort that is beneficial to charities. We note that the CRA’s recent move to make the breakdown of charities’ reported spending available in pie chart format on their website has been criticized as providing out-of-context information on which potential donors tend to rely too heavily in making donation decisions.
Extension of Carry-Forward for Ecological Gifts Program
Donations of ecologically sensitive land are already eligible for charitable donation tax credits (or deductions, for corporate donors). Budget 2014 proposes to double the carry-forward period on such donations from five years to ten. This will apply to donations made on or after February 11, 2014.
This proposal is based on a recommendation made to the House of Commons Standing Committee on Finance in its hearing on charitable donation incentives. The proposal is sensible when one takes into account that donors are limited in offsetting only 75% of their taxable income in the year and that the donation of ecologically sensitive property is not only valuable but not taxable. As a result, donations of such property can generate far greater tax credits than could be used by the donor in the year of donation and the following five years. Thus, to encourage donations of high value ecological property, Budget 2014 proposes that the credits be available for carry forward over ten years.
However, the estimation in the Budget that this change will “reduce federal revenues by a small amount” in each of the next three years is quite illogical; unless the measure is intended to apply retroactively (which is not indicated in the Budget), such an extension should not have any effect until five years from now.
Modernization of Charitable Lotteries
It is not widely known that that the absence of widespread gambling facilities in Canada is as a result of certain restrictions in the Criminal Code. A regime is in place for charities to receive special license from their province to engage in certain types of gambling activities for fundraising purposes. The restrictions effectively (although not explicitly) force charities to engage in charitable gaming that is not conducted through a computer.
When you consider some of the massively popular lotteries that are run by major Canadian charities, this restriction seems criminal in itself. Consider for example the Heart and Stroke Foundation, which estimates that its well-known lottery is costing around $1 million per year in excess administrative needs due to this restriction.
The Criminal Code will be amended to allow charities to take advantage of e-commerce technology to handle purchasing, processing, and issue lottery tickets, as well as issuing charitable donation receipts. Charities that can cut significant administrative costs through this measure may well see an up-tick in donations, as donors strongly prefer to donate to charities with lower administrative overhead.
Crack-down On Donations from State Supporters of Terrorism
The Minister of National Revenue is being given more authority to prevent state supporters of terrorism from abusing Canada’s generous registered charity system. Specifically, the CRA may refuse or revoke charitable registration of organizations that accept donations from foreign states, or agencies thereof, that are listed as supporters of terrorism for the purposes of the State Immunity Act. This is a short list, currently comprised in its entirety of Iran and Syria.
Compliance with this measure will be bolstered by information from the CRA on best practices for exercising due diligence when accepting gifts. The CRA will use existing reporting infrastructure to avoid imposing additional reporting burdens on charities. It will also apparently adjudge each case on its facts in a “fair and judicious manner”, which we look forward to witnessing.
This new measure will apply to registered charities and Registered Canadian Amateur Athletics Associations (although one wonders why Iran or Syria would want to support Canadian athletics in the first place) and will be based on donations made on or after February 11, 2014.
Removal of Exemption for Certain Gifts of Certified Cultural Property
There is a rule in the Income Tax Act that the value of a gift of property, for the purposes of calculating a charitable tax credit or deduction, is no greater than the price paid for it by the donor if the property was acquired as part of a tax shelter arrangement or held for a short period. Until recently, so-called “certified cultural property” was exempt from this rule. This is because such property was certified by the Canadian Cultural Property Export Review Board, which among other things is responsible for determining fair market value.
The new Budget, however, removes this exemption specifically for certified cultural property that was acquired as part of a tax shelter gifting arrangement. This will apply to donations made on or after February 11, 2014. It seems to us that this must be a reflection of deeper problems with the Review Board if it can no longer be trusted to do this particular job, giving the measure the air of a patch rather than a solution.