( Disponible en anglais seulement )
The Budget proposes a new measure that will increase the flexibility available to registered charities in structuring their investments.
Under the current rules in the Act, registered charities are limited in their ability to pursue business activities. Charitable organizations and public foundations are permitted to pursue a “related business” while private foundations are prohibited from pursuing any business activities. These rules resulted in limitations on charities investing in limited partnerships. It has been CRA’s administrative view that an interest that is a partnership is a business interest and thus the limitations on charities carrying on business applied. In general, under partnership legislation a general or limited partner is deemed to carry on the business of the partnership.
In practice, this has meant that registered charities were largely prevented from investing in limited partnerships or are required to implement more complex business trust structures to ensure compliance.
Many charities felt this limitation was highly impractical and prevented the effective investment of charitable funds. Registered charities have a responsibility to invest the assets of the charity prudently, and limited partnerships are a common vehicle for private equity and hedge fund investments. Furthermore, limited partnerships are often desirable as a vehicle for engaging in impact investments that generate a return on investment as well as further a social purpose. Registered charities have argued that they would benefit from a greater ability to make direct investments in limited partnerships.
The Government has responded to these submissions in Budget 2015. The Budget proposes to remove the restriction on registered charities investing as passive investors in a limited partnership. Specifically, the Budget proposes to amend the Act to provide that a registered charity will not be considered to be carrying on a business solely because it acquires or holds an interest in a limited partnership.
The Budget proposes changes to subsection 253.1 of the Act to provide that a registered charity shall not solely, because of the acquisition or holding of an interest in a partnership, be considered to carry on any business of the partnership if the following conditions are met:
- the charity – together with all non-arm’s length entities – holds 20% or less of the interests in the limited partnership;
- the liability of the members is limited (i.e. it is a limited partnership) and
- the charity deals at arm’s length with each general partner of the limited partnership.
The Budget document states that the excess corporate holdings rules – which place limits on shareholdings by private foundations – will be amended so that shares held through limited partnerships will be caught. The Budget also states that the rules regarding non-qualifying securities and loanbacks – which affect the timing and value of gifts of securities of entities related to the donor – will be amended to apply to donations of interests in limited partnerships.
The Budget notes that these rules would not apply where a charitable organization or public foundation carries on a related business through a limited partnership, as related businesses are permitted for such charities. The Budget also confirms that these measures will apply to registered Canadian amateur athletic associations.
This change will be welcome in the sector. Many charities, and in particular private foundations seeking to engage in social finance and impact investing, have been constrained by the somewhat artificial limitation on making investments in limited partnerships. Limited partnerships are an attractive investment vehicle (whether in the context of alternative investments or social finance) and it will benefit the sector to enable charities to invest in limited partnerships without having to implement complex structures to comply with the rules. This will allow more efficient and effective use of charitable capital. On the other hand, charities with existing limited partnership investments held through business trusts should seek advice on whether to unwind these trusts.
The inclusion of the 20% limit on holdings is unfortunate and could give rise to unnecessary complexity. It is difficult to understand why the Government saw the need for this requirement (and likely addition of complicated forms to track it).
The Budget papers confirmed our long held view that charitable organizations and public foundations could invest in limited partnerships that would be considered “related businesses”. This confirmation is welcome as some have challenged this conclusion in the past.
The Budget confirms that this measure applies in respect of investments in limited partnerships that are made or acquired on or after April 21, 2015.