Topics: What's New from the Charities Directorate of CRA, Canadian Charity Law, Planned Giving and Canadian Charities
The Department of Finance in late July released for consultation purposes draft legislative proposals that will have an impact on charities. The 2 main changes are an "exemption from capital gains tax for certain dispositions involving private corporation shares or real estate where the cash proceeds are donated to a registered charity within 30 days" and "providing rules to enable registered charities to acquire or hold interests in limited partnerships in certain circumstances."
The explanatory notes provide a detailed discussion of both sets of proposals. Here is the introduction to the proposal on donations to a charity after the sale of real estate or private corporation shares:
To increase support for charities, Budget 2015 proposed to provide an exemption from capital gains tax in respect of certain arm’s length dispositions of real estate or private corporation shares. The types of property that are eligible for a capital gains exemption under this measure are often illiquid and difficult to value. They are generally closely-held by families or small groups of individuals. The tax attributes associated with transactions involving these types of property are complex. These circumstances may present a heightened risk of self-dealing, unreasonable valuations, or tax planning being used to access the tax benefits of this proposal and other tax benefits in ways that are not intended. The core set of amendments to implement this Budget 2015 proposal are being released for consultation and are described in these notes. While these amendments include a number of provisions to address several potential issues that could otherwise result in unintended and undesirable effects from a tax policy perspective, concerns remain in relation to the potential use of this measure to obtain unintended tax benefits, beyond the scope of the targeted incentive. The government will continue to monitor the effectiveness of the measure and take appropriate action to address such tax planning, as required.
The explanatory note then discusses each provision relating to donations after the sale of real estate and/or private company shares.
The explanatory note also discusses investments in limited partnerships including:
Investments in limited partnerships
ITA 253.1 Section 253.1 of the Act applies for specified provisions of the Act and Income Tax Regulations where a trust or corporation holds an interest as a limited partner in a limited partnership. It provides that the trust or corporation will not, solely because of its acquisition and holding of the limited partnership interest, be considered to carry on any business or other activity of the partnership. Section 253.1 is amended in two respects. First, the existing rules are renumbered and included in new subsection 253.1(1). Second, new subsection 253.1(2) is introduced.
New subsection 253.1(2) provides that where a registered charity or registered Canadian amateur athletic association (RCAAA) holds an interest as a limited partner in a limited partnership, it will not be considered, solely because of its acquisition or holding of the limited partnership interest, to carry on any business or other activity of the partnership if certain conditions are met. New subsection 253.1(2) applies for the purposes of section 149.1 (which provides the rules that must be met for charities to obtain and keep registered status) and subsections 188.1(1) and (2) (which, in general terms, determine the tax liability of a registered charity in respect of the revocation of the charity’s registration).
The specific conditions that must be met for the provision to apply are:
by operation of any law governing the arrangement in respect of the partnership, the liability of the registered charity or RCAAA as a member of the partnership must be limited;
the registered charity or RCAAA must deal at arm’s length with each general partner of the partnership; and
the registered charity or RCAAA, or the registered charity or RCAAA together with persons and partnerships with which it does not deal at arm’s length, cannot hold interests in the partnership that have a fair market value of more than 20% of the fair market value of the interests of all members of the partnership. This amendment applies in respect of investments in limited partnerships that are made or acquired after April 20, 2015.
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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.