Government Relations News

Special Government Relations Bulletin
2008 Federal Budget

(Ottawa, February 27, 2008) The 2008 Federal Budget was tabledyesterday afternoonin Ottawa, Ontario.Below is a summary of the proposals relevant to charitable giving.

Capital Gains Tax Relief in Respect of Donation Securities – Exchangeable Shares

Capital gains realized on gifts of publicly listed securities to registered charities were exempted from tax in 2006. Budget 2008 proposes to extend this relief to certain types of securities that are not publicly traded but are exchangeable into other securities that are. Under the current rules, taxpayers who exchanged these securities into publicly listed securities which were to be gifted to charity may have realized the capital gain on the exchange and that gain did not qualify for the exemption from tax.

The proposals introduced exempt the capital gains realized on the exchange from tax where the securities acquired on the exchange are themselves eligible for a capital gains exemption (i.e. are publicly listed) and are donated to a registered charity within 30 days of the exchange. There will be certain limits applied where the exchange security is a partnership interest. These limitations will ensure that the capital gains exempted only arise as a result of appreciation of the securities and are not the result of various reductions to the adjusted cost base of the partnership interest which are available under the Act. Details of these limitations will follow.

Donations of Medicines

Last year’s Budget introduced a tax incentive for corporations that make donations of medicines to qualifying charities for use in the developing world. However, there has been some confusion as to which charities were eligible to receive these gifts. The government proposes that the eligibility of charities that qualify to accept donations of medicine for the purpose of this tax incentive will be determined by the Minister of International Cooperation. The process for determining the eligible charities will be developed by the Minister in conjunction with the Canadian International Development Agency.

The changes also propose that to be eligible for the special tax incentive the gift must be donated at least six months prior to the expiration date of the medicines.

Private Foundations: Excess Corporate Holdings

In 2007 the government extended the exemption from tax on capital gains realized on gifts of publicly listed securities to such gifts made to private foundations. As originally enacted the exemption was only available on gifts of publicly listed securities to public charities. At the same time the government extended this exemption to private foundations, it introduced the “excess business holdings” regime to limit potential opportunity for persons connected with a private foundation to use their own and the foundation’s shareholdings for their own benefit.

The excess business holding rules as enacted apply to private foundations that own more than 2% of the issued and outstanding shares of any class of share of a corporation, public or private. If the holdings of the foundation are over the 2% limit, the foundation must take into account its shares and the shares of the same class in the same corporation that are held by “relevant persons” being, generally those person that are not dealing at arm’s length with the foundation. Where the combined shareholdings between the private foundation and the relevant persons are over 2% but less than 20%, the rules require reporting. Where the combined shareholdings are greater than 20% the rules as enacted require divestiture. The grandfathering available under the original rules was limited but did partially apply to “entrusted shares” being shares that were held by the Foundation subject to a direction or trust that they be held by the Foundation in perpetuity.

Budget 2008 contains proposals to make certain amendments to the regime introduced which are intended to address concerns raised by private foundations on the rules as originally enacted. In summary, these changes will exempt from this regime certain holdings of unlisted shares that were held by a private foundation on March 18, 2007. The changes announced also contain proposals to amend the entrusted share rules and to confirm that the substituted share rules which apply in other sections of the Act will apply for the purpose of this regime. Finally, suggestions had been made that trusts could be used to work around the regime and, not surprisingly, the government proposes to extend the anti avoidance rules to shares of a corporations held via a trust. All of these amendments will be effective as of March 19, 2007, the effective date of the new regime.

For more information on the 2008 Federal Budget please visit http://www.budget.gc.ca/2008/home-acceuil-eng.htm or contact:

The above discussion of these changes written by Susan Manwaring was originally published in the Miller Thomson LLP newsletter summarizing Budget 2008 and its proposals for clients.