The Department of Finance has released the “Notice of Ways and Means Motion to implement certain provisions of the budget tabled in Parliament on March 22, 2016 and other measures and Explanatory Notes“.  Of particular interest to some within the charitable sector is the Department of Finance changing the ITA to allow private foundations and other registered charities to invest in limited partnerships as of April 2015. 

Here are some of the explanatory notes:

Clause 40

Deemed ownership of partnership property

ITA 149.1(11)

Private foundations are subject to certain restrictions on their corporate shareholdings pursuant to sections 149.1, 149.2 and 188.1 of the Act. In general, a private foundation is required to divest itself of excessive shareholdings in corporations and to disclose material corporate shareholdings in its annual prescribed information form. Section 149.1 provides the rules that must be met for charities to obtain and keep registered status. Section 149.2 provides rules relating to the calculation of the divestment obligation percentages of a private foundation in respect of its excess holdings of the shares of the capital stock of a corporation. Section 188.1 provides for the application of penalties to charities and the suspension of the privilege of issuing charitable donation tax receipts.

New subsection 149.1(11) of the Act is introduced consequential to the introduction of new subsection 253.1(2), which provides that where a registered charity or registered Canadian amateur athletic association 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. New subsection 149.1(11) provides that, for the purposes of sections 149.1, 149.2 and 188.1, each member of a partnership is deemed to own the portion of each property of the partnership equal to the proportion that the fair market value of the member’s interest in the partnership is of the fair market value of all interests in the partnership. The effect of new subsection 149.1(11) is that the calculation of a private foundation’s excess corporate holdings for the purposes of sections 149.1, 149.2 and 188.1 is determined by effectively looking through partnerships of which it is, directly or indirectly, member. This amendment is deemed to have come into force on April 21, 2015.

Clause 49

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.