Federal Budget 2003

Update from CAGP*ACPDP Government Relations

February 24, 2003
By Malcolm Burrows and Susan Manwaring

Finance Minister John Manley's first budget was a disappointment from the perspective of expanding the tax incentive available for charitable giving. There was some optimism that 2003 would be the year when capital gains on gifts of publicly-traded securities would be eliminated. This optimism was fueled by an extensive round of lobbying by the Canadian Association of Gift Planners (CAGP) and others in the charitable sector.

The October 25, 2002 paper released by the Department of Finance on the effectiveness of the existing incentive for gifts of publicly-traded securities set the stage for the potential elimination of capital gains. It provided the Federal Government with data showing the benefit of the incentive to charities in all regions and of all sizes. In addition, it demonstrated that the cost to the donor of these gifts has risen due to reduced tax rates. The Department of Finance's paper also quantified the cost to the Government of the incentive, which turned out to be negligible: a mere $15 million extra tax incentive leveraged $200 million in these gifts in 2000. Especially in light of these findings, it is discouraging that there was no action. Be assured, however, that CAGP's Government Relations Committee is continuing to work actively with both politicians and public servants to create a tax system that is supportive of charitable giving.

Charitable Tax-Shelter Arrangements

There was one announcement relevant to gift planning in the Budget. The Budget announced a change to the definition of tax shelter in the Income Tax Act, the impact of which will be to now include certain charitable gift planning "schemes". Typically, these plans are promoted to allow taxpayers to purchase art, comic books, and other collectibles at low prices and then donate them to charity to receive a large tax receipt and a profit. Other plans of this nature include time share arrangements and hedge funds. The vehicles which will be affected include donations which involve time share arrangements, hedge funds, and other similar plans. The vehicles often involve non-recourse debt and generally the donor was out of pocket very little up front but was eligible for a significant tax receipt.

The tax shelter rules require tax shelter arrangements to get an ID # and register before they are sold. These rules mean that the Canada Customs and Revenue Agency (CCRA) sees the details of the shelter from the beginning. It also creates the audit trail. Previously, the definition of tax shelter only applied when the product being sold provided tax deductions. Given that individuals get "credits" rather than deductions for charitable donations, these gift planning vehicles avoided applying for numbers, even though in substance they arguably were tax shelter type arrangements.

The rules are amended to provide that if a tax credit or deduction is available within four years of purchase, that equals or exceeds the purchaser's net cost, the transaction will be a tax shelter. Hence, no deductions or credits will be available unless the tax identification number is obtained. The amendments will specifically reference arrangements involving donations or contributions of property. They will also be amended to specifically reference the non-recourse arrangements to provide that the amount of the gift which is funded by non-recourse debt will only be eligible for treatment as a donation in the year it is repaid. These amendments are effective for gifts or contributions made after February 18, 2003.

These changes are important because they are clearly directed at gift plans promoted in the sector, which the government was unhappy about. They are a sign that the charitable sector is not to be ignored in the future and that taxpayers and charities should be cautious about deals, especially those that are too good to be true!

Malcolm Burrows and Susan Manwaring are co-chairs of the CAGP Government Relations Committee. For more information about CAGP*ACPDP, visit www.cagp-acpdp.org/index.htm.

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