Charity and Tax Law in Canada

First, some background. In Canada, on death, the Income Tax Act assumes the deceased sold all of his or her assets in the seconds preceding death and repurchased them at their fair market value. Assuming that one has taxable assets which have appreciated over time this ‘deemed disposition’ of assets can result in a significant tax liability. Unless the deceased has engaged in some planning the executors of the estate are often forced to sell the assets to pay the tax bill. If there is something particular that the deceased wanted to pass on (say a cottage) then one would have to make certain that there was enough cash in the estate to pay the taxes in order to avoid the sale of assets to raise cash.

One way to help is to lower the tax bill by donating capital items in the will (see one of my presentations on the subject here). If done properly one would create an overwhelming amount of tax credits. These credits would be used to offset the tax owing on the deemed disposition of assets at death. Thus lowering the tax bill and hopefully keeping the assets from being sold to pay the bill.

While not done by will there is a good example of this by a 92 year old artist in England who is selling his assets and donating them to charity click here. While the English system works a bit differently and this may be a tax wise move there, in Canada it would likely be best if this gentlemen donated his work to charity and let the charity sell it. At any rate, the idea is there - when you get to a certain point in your life and realize that your heirs are only interested in certain specific items you own at least give away your assets to one who wants them but in a manner which best benefits your estate.

People sometimes think that lawyers bills are over the top. While I believe people should get good value for their money, I admit that the story below got me thinking.

In 2004, a German lawyer, Dr Juergen Graefe, acted for an elderly pensioner from St Augustin, near Bonn, who was sent a tax demand for €287 million, even though the woman’s income was only €17,000. Dr Graefe fixed the problem with one standard letter to the authorities, but as German law entitles him to calculate his fee based on the amount of the reduction he obtained, his fee came to €440,234 (£308,000). It will be met by the state. There is no evidence that he pushed his luck by writing a thank-you letter.

When the last Parliament rose before the 2006 election, Bill C-21 was left to die on the order paper. For those with shorter memories, Bill C-21 was the proposed law to create a new Canada Not-For-Profit Corporations Act. It was to replace the relevant portions of the Canada Corporations Act, which was originally passed in 1917. While Bill C-21 absorbed a lot of criticism from the sector, it was a step forward in an area of the law which badly needed an update. Fortunately, the bill was resurrected as Bill C-62 when it passed first reading on June 13, 2008,
  If this bill should pass third reading and receive royal ascent it will affect every federally incorporated non-share capital corporation in the country. However, there is no need for panic in the sector. The bill will need to pass third reading and receive royal assent before being passed into law. Given that the Harper government has set an election date for October 2009 and it is entirely possible that the government will fall before then there may not be enough time for the bill to receive the necessary commentary from all the interested parties before Parliament becomes distracted with election issues.
 It remains to be seen whether this ghost of Bill C-21 will be here to stay or whether it will, again, be several years before the sector finally sees some movement.

Well, it has been sometime since I last wrote but much has been happening in the charity world (and my world) so it’s probably time I get back to writing.

Just to pick one topic, the CRA released a new proposed policy on fundraising. For me, the most important part of the policy deals with the what the CRA will consider ‘likely’ acceptable fundraising costs for a charity. This is a hot topic in charity circles and was a topic in several Toronto Star articles last year. The CRA’s limit for ‘acceptable’ fundraising costs is 35%. This is not a change in their position that fundraising costs are not part of the disbursement quota rather the 35% limit will apply to funds raised which do not require receipts.

From my perspective, I think that the 35% number is rather arbitrary but at least the CRA makes allowance for the fact that different organizations are going to have different standards. At the end of the day though this is a fairly typical attempt by the CRA to substitute their judgement for that of the taxpayer (or charity). 

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.