BILL C-33 - PROPOSED AMENDMENTS TO
THE INCOME TAX ACT AFFECTING CHARITIES
By Theresa L.M. Man, B.Sc., M. Mus., LL.B. and
Terrance S. Carter, B. A., LL.B., Trade-Mark Agent
A. BILL C-33 INTRODUCED
The long-awaited action by the Department of
Finance (the "Department") to move forward with
proposed amendments to the Income Tax Act (the "Act")
containing significant changes affecting charities were released
by the Department of Finance on November 9, 2006, by way of
a Notice of Ways and Means of Motion. The motion was
introduced as Bill C-33, and received its first reading in
the House of Commons on November 22, 2006, as the Income
Tax Amendments Act, 2006.1
The proposed changes were last released by the
Department on July 18, 2005, which amended and consolidated
earlier proposed amendments released on December 20, 2002,
December 5, 2003, and February 27, 2004. The amendments proposed
in July 2005 have been summarized in Charity Law Bulletin
Nos. 76 and 77, available on our website www.charitylaw.ca.
A number of the proposed changes contained in
Bill C-33 will substantially impact registered charities in
Canada. Some of the most significant proposed changes involve
the introduction of split-receipting rules and rules to curtail
abusive donation tax shelter schemes. These changes are contained
in subsections 248(30) to (41) of the Act. Other proposed
amendments include new definitions of charitable organizations
and public foundations, rules affecting the revocation of
charitable registrations, municipal or public bodies performing
a function of government in Canada as new qualified donees,
and new expanded disclosure of information concerning registered
charities to the public.
The provisions contained in Bill C-33 are for
the most part the same as the amendments released in July
2005, with a few exceptions reviewed below.
B. WITHDRAWAL OF REASONABLE INQUIRY REQUIREMENT
One of the main differences between Bill C-33
and the July 2005 proposed amendments is that the previously
proposed requirement in subsection 248(40) imposing a heavy
onus on a charity to make inquiries of a donor who made a
gift with an eligible amount in excess of $5,000 on or after
January 1, 2006. The charitable sector and its advisors were
very concerned with the proposed statutory onus placed on
charities when issuing receipts. In response to a submission
made by the Government Relations Committee of the Canadian
Association of Gift Planners, Len Farber of the Department
of Finance in a letter dated November 22, 2005, advised that
the Department "recognize[d] the difficulties that have
been brought to light by this proposal" placing an administrative
burden on charities. Mr. Farber indicated that the Department
was "prepared to recommend to the Minister of Finance
that proposed subsection 248(40) be withdrawn." As a
result, the proposed reasonable inquiry requirement has been
withdrawn from Bill C-33. Notwithstanding the withdrawal of
this proposed onerous rule, charities are still required to
exercise due diligence when issuing charitable donation receipts
to ensure that the information on the receipts is accurate.
C. INTER-CHARITY GIFTS
In place of the withdrawn reasonable inquiry
requirement, the Department inserted a new provision in subsection
248(40) of the Act to provide that subsection 248(30), which
deals with the intention to give where there is an advantage
to the donor, does not apply in respect of a gift received
by a qualified donee from a registered charity. This proposed
rule does not apply in respect of gifts made before November
9, 2006.
At common law, in order to qualify as a gift,
property must be transferred voluntarily with an intention
to make a gift. Where the transferor has received any form
of consideration or benefit, it is generally presumed
that such an intention is not present. Subsection 248(30)
provides the transferor with an opportunity to rebut this
presumption. Specifically, subsection 248(30) provides that
the existence of an advantage in respect of a property transferred
to a qualified donee (e.g. a registered charity) does not
"in and by itself" disqualify the transfer from
being a gift under two situations, namely (a) where the amount
of the advantage does not exceed 80% of the fair market value
of the transferred property, and (b) where the transferor
establishes to the satisfaction of the Minister of National
Revenue (the "Minister") that the transfer was made
with the intention to make a gift. Under the latter scenario,
the Explanatory Notes indicate that the taxpayer would need
to apply to the Minister for a determination of whether the
transfer was made with the intention to make a gift.
By stating that subsection 248(30) does not
apply to inter-charity gifts, this means that the common law
rule would apply. The explanatory notes to Bill C-33 indicate
that the application of the presumption rebuttal rule "is
unnecessary in the context of inter-charity transfers and
could lead to complications of the 'disbursement quota' calculation
of a charity." By providing that the presumption rebuttal
rule does not apply to inter-charity gifts, the explanatory
notes further indicate that "the eligible amount of a
gift under new subsection 248(31) should always equal its
fair market value."
However, the practical implication and application
of this provision is unclear. For example, it is not clear
how this rule would apply in situations where the transferor
charity of an inter-charity gift receives a benefit from the
transferee charity, such as a gift of a property that is subject
to a debt. In such a situation, it is not clear what would
be the amount to be included in the disbursement quota calculation,
i.e. the fair market value of the property gifted, or the
net value of the property after deducting the debt.
D. NON-APPLICATION OF DEEMED FAIR MARKET VALUE
The proposed subsection 248(35) of the Act introduces
a new deeming provision to require the fair market value of
the property that is the subject of a gift, for purposes of
determining the eligible amount of the gift under subsection
248(31), be deemed to be the lesser of (i) the "fair
market value of the property otherwise determined," and
(ii) the cost (or the adjusted cost base in the case of capital
property) of the property to the donor immediately before
the gift is made.
The proposed subsection 248(37) sets out a list
of circumstances in which the deeming provision would not
apply, including inventory, real property or an immovable
situated in Canada, certified cultural property, publicly
traded shares or ecological gifts. The deeming provision also
does not apply to circumstances involving a shareholder transferring
property to a controlled corporation in exchange for shares
issued by the corporation, and then donating the shares to
a charity, or having the corporation donate the shares to
a charity. If subsections 85(1) or 85(2) of the Act2 applied
to the transfer of such an exempt property to the corporation,
then subsection 248(37) would preclude the application of
subsection 248(35) to that property if it were then donated
by the corporation.
In addition to the above, a new exception is
introduced in Bill C-33. In this regard, the proposed paragraph
248(37)(g) provides that "a property that was acquired
in circumstances where subsection 70(6) or (9) or 73(1), (3)
or (4) applied" would be exempt from the application
of the deeming provision. The explanatory notes to Bill C-33
indicate that under those situations, the donor has acquired
the property from a transferor (such as a spouse) on a tax-deferred
rollover basis. Pursuant to paragraph 248(37)(g), unless the
transferor acquired the property within the three-year period
referred to in subsection 248(35) (or the 10-year period,
where applicable), subsection 248(35) will not apply in these
circumstances to deem the value of the gift to the donor's
rollover cost or adjusted cost base.
E. CONCLUSION
Notwithstanding the fact that these amendments
have not been enacted, Canada Revenue Agency already requires
charities to comply with the proposed split-receipting rules,
and its administrative positions have been upheld by courts.3
However, other proposed changes have not been applied by Canada
Revenue Agency, e.g. the new definition for charitable organizations
and public foundations. Therefore, the long-awaited introduction
of Bill C-33 is a welcomed move by the Department to finally
bring closure to the proposed amendments that were first introduced
four years ago.
These amendments, once enacted, will bring sweeping changes
that affect charities in many ways. It is important that charities
and their advisors become familiar with these proposed changes
in order to ensure compliance. In addition, since the effective
date for each of the new rules set out in subsections 248(30)
to (41) is different, it is important for charities to be
aware of them in order to comply appropriately.
There are still many areas where the meaning
and application of the proposed amendments are not clear.
It is hoped that these grey areas will be clarified either
by future remedial amendments to the Act or by Canada Revenue
Agency providing the charitable sector with administrative
guidelines on how these statutory provisions will be interpreted
by Canada Revenue Agency.
Endnotes
1The text of the Bill C-33 is available at http://www.parl.gc.ca/legisinfo/index.asp?Language=E&Chamber=N&StartList=A&EndList=Z&Session=14&Type=0&Scope=I&query=4876&List=toc-1.
2The "section 85 rollover" allows the transfer of
assets to a corporation at cost in exchange for shares of
the corporation. It can be used whenever the opening words
of subsection 85(1) are satisfied and the property being transferred
to a corporation is "eligible property" under 85(1.1).
Subsection 85(2) deals with rollovers from a Canadian partnership
to a corporation.
3 Richert v. Stewards' Charitable Foundation [2005] B.C.J.
No. 279, affirmed 2006 BCCA 9.
