IN THIS SECTION:
In addition to clarifying some pertinent tax rules relating to charities, the Budget includes some disappointing announcements.
Previous Budget Measures
(a) Capital Gains Exemption for Donations of Real Estate and Shares of Private Corporations
The Federal Government announced that it will not proceed with the income tax exemption proposed in last year’s Budget that was applicable to donations of cash proceeds realized on a sale of real estate or shares of private corporations. Consequently, donations of the proceeds from the sale of real estate or the sale of private company shares will remain subject to tax on the capital gains realized as a result of the transfer. Donors who donate such property will still be able to shelter some of the taxes payable on the disposition through application of the charitable tax receipt received from the gift.
(b) Investment in Limited Partnerships by Registered Charities
The Budget confirms the Federal Government’s intention to proceed with last year’s proposed Tax Act amendment, permitting, under certain circumstances, a registered charity to invest in limited partnerships. Accordingly, the draft legislation released by Finance in July 2015 remains unchanged.
GST/HST Rules that Apply to Charitable Donations
As a general rule, GST/HST does not apply to a donation to a charity if the donor does not receive anything in return. However, subject to certain exemptions, where a charity provides property or services (“supplies”) to the donor, GST/HST applies to the full value of the donation. Prior to Budget Day, this rule failed to align with the rule under the Tax Act which permits a charity to issue a “split receipt” for the amount paid by the donor less the value of any supplies provided by the charity to the donor. In effect, what the Tax Act recognizes and what the GST/HST rules failed to recognize is that notwithstanding a donor’s receipt of supplies from a charity, some portion of a donation may still have been provided by the donor to the charity without consideration and, thus, such portion should be exempt from tax.
As a relief measure for taxpayers, the Budget proposes that a donation made to a charity in respect of which a donor receives a split receipt, the donor will only be subject to tax on the value of the supplies, not the total value of the donation. This measure only applies to supplies that are not already exempt from GST/HST (e.g., where the service or property offered by the charity relates to a special fundraising event, such as a gala dinner, annual cookie sale or charity auction, or where the charity provides the donor goods that were previously gifted to the charity).
In line with Prime Minister Trudeau’s November 2015 mandate letter to the Minister of National Revenue in which he instructed the Minister to clarify the political activities rules applicable to charities under the Tax Act, the Budget confirmed that the CRA will work in consultation with the Department of Finance to engage with charities and stakeholder groups to clarify the rules governing the political activities of charities.
Enhanced Charitable Donation Tax Credit Available For Donations Made By Trusts
In December 2015, the Federal Government announced that it would increase the personal income tax rate for top earners in Canada, with corresponding changes to the charitable donation tax credit rates to introduce a top donation tax credit rate of 33%.
The Budget proposes technical changes to ensure that this increased charitable donation tax credit rate applies to all taxpayers with income that is subject to the new 33% rate, including trusts and graduated rate estates (“GREs”), a concept introduced in the 2014 Budget, effective as of January 1 of this year. These proposals appear designed to ensure that the 33% donation tax credit rate applies to all income of these taxpayers that is taxed at the highest marginal rate. Trusts that are subject to the 33% rate on all of their taxable income will receive a donation tax credit of 33% on all donations above $200 made after the 2015 taxation year. The measure will also extend the proposed 33% charitable donation tax credit to be available for donations made by a GRE during a taxation year of the estate that straddles 2015 and 2016.
Please see our Charities and Not-For-Profit Newsletter for a full discussion of the impact of the Budget on the charitable sector.
In the Budget, the Federal Government reiterated its support for initiatives that encourage the exercise of direct taxation powers by Aboriginal governments. The Federal Government noted that, to date, it has entered into more than 50 taxation arrangements in respect of sales tax and personal income tax with Aboriginal governments. The Federal Government confirmed its willingness to discuss and put into effect direct taxation arrangements with interested Aboriginal governments. The Federal Government also reiterated its support of direct taxation arrangements between interested provinces or territories and Aboriginal governments and confirmed that it will continue to facilitate such arrangements.