Charity and Tax Law in Canada

My friend Danny Strigberger, besides being a great lawyer, is also a funny guy. He’s put together this website which you might enjoy www.legalhumor.com.

For those who have been awaiting the implementation of the new intermediate sanction rules it appears that the Canada Revenue Agency is finally making use of them.
 

On November 29, 2007 a news release went out on the Canada Revenue Agency website and ostensibly to the media indicating that the International Charity Association Network (ICAN) has had their charitable registration suspended for failing to maintain sufficient documentation in regards to payment and expenditures made by the charity. In addition to the notice of the suspension the news release also states that a charity which has been suspended has no authority to issue donation tax receipts nor is it considered to be a qualified donee.
 

Probably one of the worst punishments that come with being a suspended charity is the fact that a news release is sent out indicating your suspension. We would imagine that this in and of itself spells a great deal of trouble for the suspended charity.

 Many organizations take it as a given that their annual returns which have to be filed with the Canada Revenue Agency are due at the same date every year and for most organizations this is the case. However, for trusts this understanding might pose a serious problem during the leap year.
A trust has a calendar year end of December 31^st.  For trusts which file T3 Returns the deadline for filing is 90 days from the end of the year. In an ordinary year the T3 Return would be due March 31^st, however, during a leap year the deadline for the filing of a T3 Return is March 30^th.
As most organizations have their deadlines calculated in months or an exact as stated in the Income Tax Act the fact that 2008 is a leap year will not affect the vast majority of tax payers, however, constant vigilance is always required.

I’ve been reading up lately about the life settlement market in the United States. This refers to the purchase of life insurance policies from people who may not need them anymore for a fraction of the face value and a commitment to taking over the life insurance premiums by the purchaser.

The market for life settlements grew out of the viatical settlement market whereby people with a life expectancy of two or three years (generally AIDS patients) sold their life insurance policies in order to have the funds to pay for medical expenses in the last years of their lives.

As people often take out insurance policies for specific purposes I think that there is certainly a time and a place for the selling of life insurance policies. However, Canadian securities laws generally do not allow for the trafficing of insurance policies. On the other hand, this legal block opens up the market for charities who may want to encourage the gifting of unnecessary insurance policies to charity.

Not only does the individual (or corporation) rid themselves of paying the premiums but it also has generated a leveraged receipt. The charity on the other hand can simply cash in the policy and use the cash for its own purposes (or of course it can wait for the policy to mature).

 Many Canadians are aware that it is important to have a will to organize their affairs after death. However, many Canadians are woefully unaware of the tax consequences upon death and ways to mitigate those consequences. Given that people spend a lifetime earning their wealth one would imagine that steps to preserve it after death would be a priority.

 In Canada, we tax assets (such as stocks, real estate, and artwork) on their appreciation but we defer collecting the tax until the owner disposes of the asset. When a Canadian resident dies, the law deems the individual to have disposed (i.e. sold) all of his or her assets and then repurchased them immediately at fair market value. Thus, on death the taxpayer (or more accurately the taxpayer’s estate) owes tax on the entire appreciation of value, if any, since the purchase of the asset. Of course, if the owner had sold the asset he or she would have cash to pay the tax unfortunately heirs often have to sell the assets simply to pay the tax. Thus, if one wants to ensure that assets are left to the next generation, proper planning is required.

The good news is that there are steps that Canadian residents can take to mitigate some of the ill effects of this deemed disposition. One of these mechanisms is the donation of capital assets to charity. To understand how this works it is important to remember that even when a Canadian donates a capital asset to charity, tax is (usually) payable on 50% of the gain in value between when the donor bought and sold the item, but the donor receives a receipt for the full value of the item. Thus, on a donation of a capital asset, the tax credits completely offset the tax payable and there are still tax credits calculated on 50% of the value of the donated item to offset other taxes owing. At death, this could be useful to offset the taxes owing on items you want to keep in the family but that heirs would otherwise have to sell in order to pay the tax. This effect is even greater when donations are made of certain types of capital items, such as cultural property, ecological property, and public securities, which do not generate any tax when properly donated.
 

It is important to remember though that these tax credits are applied in one’s terminal year return (i.e. the return filed for the period from January 1^st up to the date of death of the individual) and must be made in the will. If one relies on one’s executor or executrix to make the donation from the estate without mentioning it in the will, the resulting tax credits will  not be usable to offset the taxes owing on death as a result of the deemed disposition.

In order to be a valid gift, there must be a certainty of object, an acceptance of the gift by the recipient and, of course, a transfer of the item from the estate to the charity. In order to ensure that all of these are met it is important to speak with the charity in advance in order to ensure that the charity will accept the donation (usually not a problem in the case of cash) and to obtain the correct legal name of the charity.

After death it would be impossible for you to ensure that these criteria are met and so appropriate precautions should be taken now.
 

If you have any questions on this matter, please feel free to contact me. I can be reached at (613) 233-2675 ext 17 or at my email address.

Let me begin by saying that I really enjoy what I do. Being a tax and charity lawyer is intellectually challenging and it lets me help charities help others, so I go home at night feeling pretty good. But, when I saw this quote from James Baldwin I knew it was true. For those of you entering a profession and believe everything you see on TV, think again, nothing is ever so simple.

The price one pays for pursuing any profession or calling is an intimate knowledge of its ugly side. 

Over the past several months I’ve made several presentations to hundreds of charity professionals and potential donors regarding unusual gifts in kind. To see a copy of the presentation send me an email. But in the meantime you may want to see a related article in the Globe and Mail see here.

For those who did not follow the Ontario election, the defining issue was the funding of faith based schools. In Ontario, the provincial government funds public schools and, because the constitution says so, Catholic schools. Notably, any school which does not fall into either of those two categories does not get any funding (even though some portion would go to the same curriculum taught in the public schools).

I won’t go into all the politics of all this but I think everyone (except Dalton McGuinty) sees the inherent fairness in funding one set of religious schools and none else. I certainly see it as unfair and I find this particular policy extremely prejudicial against people who are forced to fund someone else’s kid’s education as well as their own. So you can imagine that it was particularly galling that I had to have to vote in a Catholic school.

This is the epitome of adding insult to injury.

The Supreme Court of Canada released its highly anticipated decision in the AYSA (Amateur Youth Soccer Association) on October 5th.

AYSA is an organization created for the purpose of promoting soccer in Ontario. It applied for registered charity status but was rejected on the basis that promoting amateur sport was not a charitable activity. Moreover, as the organization was based only in Ontario it could not qualify as a Registered Canadian Amateur Athletic Assocation (an “RCAAA”). The organization appealed the decision to the Federal Court of Appeal and then to the Supreme Court of Canada.

The decision was an interesting exposition of how the law of charity develops, but in the end the charity lost on the basis that the promotion of any particular sport is not a charitable activity.

What I found most interesting about the decision was the Court’s comment in obiter dicta (comments which are not strictly necessary to the decision) that it would be sympathetic to an argument that fitness was a charitable activity. In my mind, this is an invitation to the sector to register an organization which promotes fitness (perhaps through the use of soccer).

I have often thought that the Conservative government made a mistake when they decided to use the Income Tax Act to create a deduction for money spent on fitness plans for children. That deduction is riddled with practical difficulties in, for example, determining which programs qualify for the deduction. From a policy perspective it seems to me that we should be promoting fitness amongst both children and adults in a manner that is simple and well known to Canadians. If this isn’t done through the expansion of the heads of charity (i.e. those objects which are considered charity) it should be done through the use of the RCAAA model. (The RCAAA was apparently created to ensure that the promotion of amateur sport in Canada would have tax credit treatment). I think the use of the RCAAA model / charity model could lend itself well to other areas such as the promotion of think tanks (and the concomitant increase in policy development in Canada).

It will be interesting to see if there is a reaction from the government and how the law develops.

Given that I recently mentioned charity in the religion context I thought I should point out what I’ve always considered an interesting part of the Jewish Yom Kippur prayers. As many readers will know, Yom Kippur is the Day of Atonement. On this day, the fate of individuals and nations is sealed. At one point we refer to the fact that repentence, prayer and charity avert the Divine decree.

To my mind, the inclusion of charity has always been somewhat out of place. That is, most of us see the merit of charity easily (i.e. we give to the poor and they eat, we support a hospital which heals the sick, we teach a child and they learn) but we don’t think of repentence and prayer as being purely spiritual matters which may have some metaphysical meaning but none on a practical level. 

But perhaps there are two lessons to learn here. For one thing, perhaps repentence and prayer do have an impact in this world. By repenting and trying to live better lives we have an impact on ourselves and the world around us. As for prayer, the common law has always recognized the benefits for an orderly society of a population dedicated to God.

Conversely, the lesson to learn about charity is that, when done with the right mindset, it is not simply a practical matter but a spiritual one as well that affects not only the recipient but the donor as well. Just like repentence and prayer which focus the individual on self improvement, so too does giving charity improve the character of the donor to one who is generous, kind, well-intentioned and concerned about the well being of others.