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Federal budget takes aim at perceived lack of transparency
On March 29, 2012, the government introduced the 2012 Federal Budget ("Budget 2012"). While the 2011 Federal Budget had introduced extensive changes affecting registered charities, Canadian amateur athletic associations and other qualified donees, Budget 2012 focuses largely on measures dealing with the perceived lack of transparency and accountability concerning charities devoting their resources to political activities. Some of the more important proposals affecting registered charities in Budget 2012 are summarized below.
Perceptions shape political activity provisions
In relation to limits on political activities, Budget 2012 states that "concerns have been raised that some charities may be exceeding these limitations and that there is currently no requirement for a charity to disclose the extent to which it receives funding from foreign sources for political activities."
These comments refer to recent media coverage concerning the debate in the Senate around alleged donations to Canadian registered charities by foreign donors that are thought to use those funds for political activities.
In response, Budget 2012 provides the Canada Revenue Agency with the authority to suspend for one year the tax-receipting privileges of charities which exceed the limitations contained in the Income Tax Act (Canada) ("ITA") on political activities. In addition, a one year tax-receipting suspension can also be applied by CRA to charities that provide inaccurate or incomplete information on their T3010-1 annual returns.
While this amendment does not refer explicitly to political activities, it can be assumed that this will provide CRA with a new sanction to apply to charities which inaccurately report their political activities or fail to disclose gifts received from foreign donors. As well, Budget 2012 indicates that charities will be required to provide more information concerning their political activities, including the extent to which they may be funded by foreign sources, although no details are provided concerning what this requirement will actually involve.
Budget 2012 also proposes to amend the ITA in order to restrict the perceived funding of political activities by registered charities through gifts to other qualified donees. In order to do so, Budget 2012 proposes to amend the definitions of both "charitable purposes" and "political activity," as well as other collateral amendments to the ITA.
Specifically, the definition of "political activity" will be amended to indicate that it "includes the making of a gift to a qualified donee if it can reasonably be considered that a purpose of the gift is to support the political activities of the qualified donee." The definition of charitable purposes is also proposed to be amended so that it excludes a gift, "the making of which is a political activity." However, there is no indication what the phrase "can reasonably be considered" will actually mean in practice.
These changes regarding political activities will apply on Royal Assent to the enacting legislation.
New rules for eligible foreign donees
Currently, the ITA recognizes as qualified donees certain registered foreign charitable organizations outside Canada that have received a gift from Her Majesty in right of Canada. In accordance with the 2011 Federal Budget, the Charities Directorate maintains a listing of these organizations in Attachment to IC84-3R, Gifts to Certain Charitable Organizations Outside Canada.
However, Budget 2012 proposes to modify the rules for the registration of foreign charitable organizations that have received gifts from the Government of Canada, by replacing organizations outside of Canada that have received a gift from Her Majesty in right of Canada with designated foreign organizations. In this regard, Budget 2012 proposes that foreign charitable organizations that receive a gift from the Government of Canada may apply for qualified donee status if they pursue activities related to disaster relief or urgent humanitarian aid, or in the national interest of Canada.
In addition, the Minister of National Revenue will have the discretionary power, after consultation with the Minister of Finance, to grant qualified donee status to foreign charitable organizations that meet the above criteria. These measures will apply to applications made by foreign charitable organizations on or after the later of January 1, 2013 and Royal Assent of the enacting legislation.
Penalties for tax shelter promoters
Budget 2012 proposes that, in cases dealing with charitable donation tax shelters, the penalty to the promoter will be the greater of the amount determined under the existing rules and 25 per cent of the amount asserted by the promoter to be the value of property that tax shelter participants in the tax shelter can transfer to a donee.
Budget brings new challenges
While Budget 2012 is not as sweeping in scope as was the 2011 Federal Budget, there will nonetheless be new challenges for registered charities to be concerned about in conducting political activities. In particular, it is not clear how proposed amendments to the ITA which will deem certain charitable activities to be political activities will apply, or what kind of due diligence will now be necessary for charities making a gifts to other qualified donees to ensure that the charity is not caught by the deeming provision, or what sort of reporting requirements will be required of charities concerning political activities, including disclosing "funding from foreign sources."
Restricting the designation of foreign organizations would not affect those organizations that are currently listed. However, some of them may no longer qualify after that time. As well, this new restriction will limit the type of organizations that would qualify, making an already short list even shorter.
Ryan Prendergast was called to the Ontario Bar in 2010 and joined Carters to practice in the areas of charity and not-for-profit law, corporate and commercial law, and human rights law.
Ryan graduated from the University of Ottawa, Faculty of Law, in 2009. While articling with Carters, Ryan acquired experience in the areas of charity and not-for-profit law, corporate/commercial law, civil litigation, wills and estates, and human rights law. In addition, he contributed to several Charity Law Bulletins and other publications.
Mr. Carter is also editor of www.charitylaw.ca, www.churchlaw.ca and www.antiterrorismlaw.ca and a consulting editor of Charities Legislation and Commentary 2009 Ed.
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