On April 26, 2012, the federal government introduced Bill C‑38, which contains proposed changes to the Income Tax Act (Canada) (ITA) affecting charities and how political activities are to be accounted for, in the context of a gift from one charity to another.

We provide a brief summary of the current legislative provisions, the proposed changes, and the impact of the changes on charitable foundations and organizations.

1. Current Situation

   As currently defined in the ITA, charitable purposes include the disbursement of funds to qualified donees, usually other charities.

   Charities are permitted to disburse funds as a gift to other qualified donees.

   If some of the gifted money is used by the recipient qualified donee for political purposes, that does not need to be accounted for in the political activities of the granting charity.  Only the recipient of the funds must account for its political activities with the use of those funds.  Under current guidance and court decisions, the accepted rule is that charities can conduct up to 10% of their activities for political purposes, if those activities are ancillary and incidental (subordinate) to the charitable purpose

2. Proposed changes

   Bill C‑38 proposes to change the definition of “charitable purpose”, to exclude disbursement of funds to a qualified donee where the gift funds a political activity of that qualified donee.

   Bill C‑38 will also amend the ITA to introduce a legislative framework in relation to political activities. The definition will read as follows:

   ‘political activity’ includes the making of a gift to a qualified donee if it can reasonably be considered that a purpose of the gift is to support the political activities of the qualified donee.

   Thus, the making of a gift to a qualified done, where the gift is for a political activity, is not a charitable purpose.

   The definition for “political activity” only requires that a purpose of the gift is to support political activities, and not that the entire gift be used for political activities.  Even if only a part of the gift were used by the qualified donee for the purpose of political activities, the entire gift would be considered a political activity for the donor charity.

3. Impacts on the grantor and grantee

   If a gift has as a purpose the support for the political activities of the qualified donee, the granting charity will no longer be able to count its gift as an expenditure towards its charitable purposes.

   Charities can still allocate up to 10% of their resources to political activities that are ancillary and incidental to their charitable purpose.  However, they will need to make appropriate inquiries about how their gifts to qualified donees will be used. They must be cognizant that gifts to qualified donees that are used for political activities will be included in the political activities of the donor charity as well.

   These new rules are clearly intended to restrict political activity, without changing the 10% rule directly. For the granting charity, this increases the likelihood that the 10% cap on political activity is reached more quickly.  This will obviously have an impact on the recipient charities as well:  if the granting charity is reaching its 10% limit sooner, it will mean less money going to recipients, if the recipient’s activities include as “a purpose” political activity.  Recipients will be forced to “write out” any political activities from their proposals to funders.

Filed in: Charities

Tags: Bill C-38, Charity to charity grants, Conservative 2012 budget bill, Income Tax Act, Political giving