NEW TAX RULES EFFECTING PRIVATE CORPORATIONS

On July 18, 2017, the Liberal government and the Department of Finance issued draft legislation which significantly alters the tax planning available for private corporations. The following is a brief summary of each of the proposed new rules. We strongly suggest you consult your Segal advisor to discuss how these rules affect you and your business.

Income Splitting

It has been common tax practice to set up a structure whereby a trust owns shares in an operating company with both minor and adult beneficiaries. Alternatively, family members owned shares directly in the operating company. In the past, dividends could be paid to the adult family members who would pay tax at their graduated tax rate. For those adult family members who earned no other income, such as a student, the tax owing could be low on those dividends.

The new legislation proposes to tax those dividends at the highest tax rate. As well, the new rules propose to tax other kinds of income paid to related adult family members. There is relief if the adult family member contributes to the corporation by way of capital or involvement. CRA will have discretion to determine if the amounts paid to the related adult family member are reasonable in the circumstances. These rules are effective in 2018.

Multiplication of the Capital Gains Exemption

In the structure noted above, if a trust owns shares in an operating company, it is possible that a capital gain realized by the trust could be allocated to the beneficiaries and the beneficiaries could claim the capital gains exemption. The new rules would eliminate the ability for a trust to have a capital gain subject to the exemption. Moreover, any gain on a share owned by a trust would not be eligible for the capital gains exemption. This would also apply where family members acquired shares for a nominal amount without the use of a trust. If shares were owned by a minor, and the shares were ultimately disposed when that individual became an adult, the gain that would have accrued while the individual was a minor could not be sheltered by the capital gains exemption. The capital gains exemption will not be available to family members who are subject to the income splitting rules noted above.

There is a rule that will allow for trusts and family members to make an election to crystallize the capital gains exemption in 2018. However, this crystallization will only be available to adult beneficiaries and adult family member shareholders. These rules are effective in 2018.

Conversion of Dividend Income to Capital Gains

There is a significant difference in the tax rate of a dividend (39.34 or 45.30%) and capital gains (26.76%). Historically, with tax planning, one could convert what otherwise might have been a dividend into a capital gain. The new rules propose to convert the capital gains realized between non-arm’s length parties into a deemed dividend. This would mean that the tax-free portion of the capital gain would not be added to the capital dividend account. Moreover, it appears that there would not be an increase of the cost base of the shares that were received as consideration which could possibly result in double taxation.

There are also new rules that propose treating payments out of the capital dividend account as a taxable dividend where the capital dividend account was created by transactions whose goal was to reduce the personal income tax of the shareholder.

These rules could also affect post-mortem planning. These rules are effective for transactions and amounts paid or payable after July 18, 2017.

Making Investments in an Operating Company

While still in the public consultation phase, the government has proposed to increase the tax burden on an active corporation investing surplus funds. Those investments would no longer enjoy preferential tax treatment and access to the refundable tax regime and capital dividends. The government appears to be concerned that an active company subject to low tax rates would have significantly more to invest than if the funds were paid to the individual shareholder and all taxes were paid.

This issue gets complicated in terms of tracking which investments are from surplus funds and what the actual income related to those surplus funds are. The government has asked for input on how to apply their proposals.

Summary

These proposals are significant on their own and collectively will change the tax planning landscape for all privately held businesses and their shareholders. Every situation where a trust owns shares in a private corporation must now be evaluated to determine what the best tax planning is on a go forward basis.

Please contact your Segal advisor as soon as possible so that planning can start now.

Segal LLP | Tax Advisory

Segal LLP A 2017 Best of the Best Firm

best2017INSIDE Public Accounting (IPA) has named Segal LLP a Best of the Best Canadian Firm for the second consecutive year.  Segal is honoured to be one of only 5 Canadian CPA firms ranked as a 2017 Best of the Best firm based on a wide variety of financial and operational performance.

“We are honoured to once again be named a Best of the Best in Canada; it is a vote of confidence in our people and in Segal’s unwavering commitment to client service, our vision and our approach to our business” said Dan Natale, Managing Partner at Segal.

“Best of the Best firms excel by achieving the delicate balance of focus on culture, clients, team and financial results,” says Michael Platt, principal of the Platt Group and publisher of the accounting trade publication, INSIDE Public Accounting.

Proposed New Tax Rules – Have Your Say

new-tax2

On July 28, 2017, the Segal team shared a summary of the proposed tax changes that Liberal Finance Minister Bill Morneau presented on July 18, 2017. You can review that summary here: http://www.segalllp.com/2017/07/28/new-tax-rules-effecting-private-corporations/

As professionals and business owners, we have studied and developed a better understanding of these proposals, and implications of these rules are far reaching and did not contemplate the negative consequences if adopted. The “marketing” of these proposals by Mr. Morneau and the government was very different than the actual content within the proposal language. As a business owner, these rules will affect you adversely as they relate to all privately held Canadian corporations.

We believe as Canadian professionals and taxpayers, that the Members of Parliament (MP) need to hear and understand our concerns so that they can be communicated to the Finance Minister. Attached is a letter that the Segal partners, principals and team are sending to their Member of Parliament to express their concerns on new rules that will fundamentally change the way private corporations are taxed.

We are sharing it with you should you be considering providing the Minister of Finance with the feedback he has asked for; the 75-day consultation period ends October 2, 2017. Feel free to use any part of this letter in your communications with your Member of Parliament and copy Minister Morneau. You can find your MP’s contact information here: https://www.ourcommons.ca/Parliamentarians/en/members?view=List

When You Owe Money to the Canada Revenue Agency

canadian-dollors

The Canada Revenue Agency (CRA) doesn’t publish information or statistics on the number of individual taxpayers who owe money in the form of back taxes, interest, or penalties. Nonetheless, it’s a safe assumption that some percentage of the 28 million or so Canadians who filed a tax return this past spring either couldn’t pay their 2016 taxes when due or still owe money from past years, or both. Being unable to pay one’s bills on time obviously isn’t desirable, no matter who the creditor is, however, there are several reasons why owing money to the tax authorities is a particularly bad idea.

Start with the interest cost of carrying such debt- interest rates remain near historic lows, but the CRA, by law, charges interest at levels higher than normal commercial rates. The interest rate charged by the CRA on overdue or insufficient tax payments is set quarterly. For the third quarter of 2017, covering the months of July, August, and September, the interest rate charged on taxes owing is 5%.

While that 5% rate is still lower than the interest rate charged on many credit card balances, it is the interest calculation method used by the CRA which can really inflate the cost of having tax debts. Where an amount is owed to the CRA, interest charged is compounded daily, meaning that on each successive day, interest is being levied on the interest charged the day before. Not surprisingly, interest costs calculated in that way can add up quickly.

The CRA has a very broad range of options at its disposal to compel payment, and a very long period in which to use them. Where a taxpayer hasn’t paid an amount owed within 30 days after he or she receives a Notice of Assessment the CRA will usually contact the taxpayer, by phone or by mail, with a request for payment. If the taxpayer does not contact the CRA to make a payment or set up a payment arrangement within 90 days after the date the Notice of Assessment was mailed, the CRA will resort to its other collection options.

The CRA has the right, where there are any amounts owed to the taxpayer by any other department of the federal government (for example, a goods and services tax credit amount) to seize those amounts and apply them to the tax debt. The CRA also has the authority to intercept or garnish money which may be owing to the taxpayer from a third party, like an employer and, as a last resort, can direct that the taxpayer’s assets be seized and sold to satisfy the tax debt.

The CRA’s goal, like that of any other creditor, is to get the debt paid without having to resort to expensive and time-consuming administrative or legal processes.  It’s relatively rare for a tax debt to reach the stage of litigation or garnishment, as it is in everyone’s interest to resolve matters before things reach that point. And, perhaps contrary to popular belief, the CRA has some flexibility. When the amount of taxes due on filing can’t be paid, or can’t be paid in full, it’s in the taxpayer’s best interests to contact the CRA and let them know of that fact.

Not surprisingly, the CRA tries to make it easy for taxpayers to contact it to make such arrangements. The taxpayer can propose a payment schedule based on his or her ability to pay, and the CRA, if it is satisfied that the inability to pay is genuine, will generally be amenable to entering into some type of payment arrangement. Entering into such a payment arrangement does not, of course, stop the interest clock from running, as interest will continue to be assessed at the current rate, and compounded daily.

The alternative to making a payment arrangement and becoming subject to the CRA’s punitive interest assessment practices is sometimes to borrow the required funds at a lesser rate from a third party.  One final blow: interest paid on tax debts, whether paid to the CRA or to a third-party lender, is not deductible from income.

Tax Changes for Students

college

The end of summer means back to school for students of all ages. For parents of elementary and secondary school students the focus is on obtaining back to school clothes and supplies and starting the process of enrollment in after-school activities for the fall. For those already in (or starting) post-secondary education, choosing courses, finding a place to live and paying the initial bills for tuition and residence are more likely to be on the immediate agenda.

What both groups of parents and students have in common this school year, however, is that this is the first full school year affected by previously announced tax changes. Each of those tax changes, for students at all levels, means higher after-tax costs for education-related expenses.

For students enrolled in the public education system there is no cost to attend, however there are out-of-pocket costs for participation in most after-school activities.  Depending on the activity, those costs can easily amount to several hundred dollars per child over the course of the school year.  Parents have been able to offset those out-of-pocket costs by claiming the children’s arts credit or the children’s fitness credit; both credits have been eliminated as of the 2017 tax year. In budgeting for the cost of any contemplated after-school activity, parents must budget on the basis that they will be paying the full cost out-of-pocket, and will not be claiming any offsetting tax credit on their tax return for 2017.

There is some good news for parents of elementary school-aged children, in that fees for after-school care, can still be claimed as part of the general child care expense deduction. The deduction may be claimed (within specified limits) where child care costs are incurred for the parent to work, at employment or self-employment. The amount of deduction claimable depends on the age of the child and the actual amount expended, with an overall limit based on family net income. More information on claiming the child care expense deduction can be found on the Canada Revenue Agency (CRA) website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-214-child-care-expenses.html.

At the post-secondary education level, students (and their parents) have benefitted from an “assist” through our tax system, which provides deductions and credits for some of the associated costs of college or university.  Two of those credits are, however, no longer available.

The biggest cost of post-secondary education is tuition, and the tax credit provided for eligible tuition costs remains in place the upcoming (and subsequent) academic and taxation years. Any student who incurs more than $100 in tuition costs at an eligible post-secondary institution can still claim a non-refundable federal tax credit of 15% of such tuition costs.  Some provinces and territories also provide students with an equivalent provincial or territorial credit, with the rate of such credit differing by jurisdiction.  In Ontario, a tuition credit can be claimed for eligible tuition up to September 4, 2017.  At both the federal and provincial levels, the credit acts to reduce tax otherwise payable. Where a student doesn’t have tax payable for the year, as is often the case, any credits earned can be carried forward and claimed by the student in a future year, or transferred in the current year to a spouse, parent, or grandparent.

For many years post-secondary students have also been able to claim two other federal tax credits — the education tax credit and the textbook tax credit. Both have been eliminated, however, where the education and textbook credits have been earned but not claimed in previous years, they are still available to be claimed by the student as carryover credits in 2017 or later years.

The CRA publishes a very useful guide to tax measures which affect students enrolled in post-secondary education. That guide, entitled Students and Income Tax, has been updated to take account of the recent changes, and the most recent version is available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tg/p105/README.html.

Claiming the Guaranteed Income Supplement (September 2017)

Pensions

Most Canadians approaching retirement know that they will have some retirement income through the Canada Pension Plan (CPP) and Old Age Security (OAS) programs. Many, however, are unaware that there is a third federal program, the Guaranteed Income Supplement (GIS), which provides an additional monthly income amount to eligible individuals. While there is no need for an individual to apply to receive an Old Age Security benefit, anyone who wishes to receive the GIS must apply to do so. Automatic enrollment in GIS is something that is planned for future implementation, but is not yet in place. Finally, while the OAS benefit is a standard amount for most recipients, the rules governing eligibility for GIS, and the amount an individual will receive, are more complex.

The first and most basic rule of GIS eligibility is that GIS is paid only to individuals who are already receiving the Old Age Security benefit. Canadians can begin receiving such OAS benefit at age 65, or can defer receipt of that benefit up until the age of 70. However, regardless of the age at which an individual chooses to begin collecting OAS, he or she cannot receive the GIS until that OAS benefit has started.

There is a perception that GIS benefits are available to only the lowest income seniors. While it is true that eligibility for the GIS is tied to income, the current reality is that in the first quarter of 2017, nearly 2 million Canadians, or nearly one-third of those who collect OAS, also received GIS benefits.

The basic rule is that single (or divorced or widowed) individuals who have less than $17,688 in net income for the previous year are eligible to receive at least partial GIS benefits each month. Once net income exceeds the $17,688 threshold, eligibility for GIS is eliminated. That figure is somewhat deceiving, however, as not all income sources are treated the same way when it comes to determining net income for purposes of assessing GIS eligibility. When determining such eligibility, the sources from which income is received is nearly as important as the amount of that income.

Generally, in calculating net income for purposes of determining GIS eligibility, the following income amounts are included:

  • Canada Pension Plan or Quebec Pension Plan amounts;
  • Amounts received from a registered retirement savings plan (RRSP) or a registered retirement income fund (RRIF);
  • Amounts received from a registered pension plan (i.e., an employer-sponsored pension plan); and
  • Investment income (interest, dividends, etc.) from all sources.

The following income amounts are not included in net income for purposes of determining GIS eligibility:

  • Old Age Security amounts; and
  • Withdrawals from a Tax-Free Savings Account (TFSA).

Finally, many retirees work part-time, whether out of financial need or for social reasons. In calculating net income to determine GIS eligibility, an exemption is provided for the first $3,500 in employment income earned each year.

In 2017, an individual who is single, divorced, or widowed and is eligible for a full GIS amount will receive $871.86 per month. That amount is reduced as income increases and is eliminated entirely where the individual’s net income exceeds the $17,688 cut-off.

A similar calculation is required for taxpayers who are married. The net income calculation is the same, but the cut-off amount above which GIS eligibility for both spouses is eliminated, where both spouses are receiving OAS, is $23,376. Where one of the spouses does not receive OAS, the combined income threshold for GIS eligibility is $42,384. More information on the benefit and income cut-off amounts for the current quarter (July to September 2017), as well as links to tables which will show the exact amount of GIS payable at different income levels, can be found on the Canada.ca website at https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/payments.html.

A final note — where individuals receive the Guaranteed Income Supplement, whether the full benefit or partial amounts, all such amounts received are non-taxable.

Your TFSA – Mid-Year Checkup

TFSA

Tax-free savings accounts (TFSAs) have been part of the Canadian tax system for nearly a decade, and millions of Canadians utilize them as a savings vehicle, whether for short-term or long-term purposes.

Of all tax-deferral or tax-savings plans available to Canadians, TFSAs undoubtedly provide the greatest flexibility, as the TFSA rules allow taxpayers to carryover allowable contribution room to future years and to re-contribute amounts withdrawn. However, that very flexibility, especially the ability to re-contribute previous withdrawals, also has the potential to cause taxpayers to run afoul of the rules by getting into an inadvertent overcontribution position, resulting in the imposition of penalty taxes.

A brief recap of the TFSA rules: every Canadian aged 18 years of age and older can contribute a specified annual amount to a TFSA ($5,500 for 2017). Funds contributed to the TFSA are not deductible from income, but investment income earned by those funds is not taxed, either as it accrues or on withdrawal. Where a taxpayer does not contribute to a TFSA within a particular year, the contribution not made can be carried forward and made in any subsequent year. TFSA holders can withdraw funds from their plan at any time, free of tax, and funds withdrawn can be re-contributed, but not until the following year.

Calculating one’s current year contribution room can be complex. The Canada Revenue Agency does not provide taxpayers of their current year TFSA contribution limit on the annual Notice of Assessment; taxpayers can access that information through the CRA’s automated telephone service, online portal or have their service provider do the calculation for them.

Once the taxpayer knows their contribution limit for 2017, it’s necessary to calculate how much has already been contributed in 2017. The difference between those two figures represents the balance which can be contributed before the end of the year without getting into an overcontribution position and incurring penalties. It is important to remember that if withdrawals have been or will be made during 2017, those amounts cannot be re-contributed until after the end of this year.

If it’s necessary to adjust regular contributions in order not to go “offside” by the end of the year, the best time to do it is obviously before getting into that overcontribution position. As soon as a taxpayer is in an overcontribution position, the 1% penalty tax is imposed for that month, even if the excess funds are withdrawn before the end of the month -  in other words, as explained in the Canada Revenue Agency guide to TFSAs “[I]f, at any time in a month, you have an excess TFSA amount, you are liable to a tax of 1% on your highest excess TFSA amount in that month.”

Especially where TFSA contributions are set up to occur regularly, by automatic deposit or bank transfer, it’s easy to assume that everything has been taken care of and nothing further needs to be done with respect to such arrangements. However, an “out of sight and out of mind” approach rarely makes for good financial and tax planning, and checking on the status of one’s TFSA on a periodic, at least quarterly,  basis can help to ensure that everything is as it should be, and that unnecessary penalties are avoided.

Getting a Mortgage now – What is a “stress test”?

mortgage-stress

The Bank of Canada’s recent decision to raise interest rates generated a lot of media attention, because while the increase itself was only one quarter of a percentage point, it was the first move made by the Bank of Canada to increase rates in the past seven years    Speculation was whether this or future increases in interest rates would act as a barrier to those seeking to get into the housing market.  The mortgage financing “stress test” — is likely one that is unfamiliar to most Canadians, even those who are affected by it.

When anyone seeks to borrow money, a key factor in determining their ability to obtain a loan is, their ability to repay the loan/That same consideration applies when an individual or a couple apply for approval or pre-approval of a mortgage.

In determining whether a borrower will be able to repay the mortgage loan as required, mortgage lenders rely on two debt-to-income ratios, known as Gross Debt Service (GDS) and Total Debt Service (TDS). The two are similar, but not the same.

The GDS ratio measures how much of the would-be borrower’s income will be needed to meet his or her housing costs. For any borrower, GDS represents the total of mortgage payments, property taxes, heating costs, and — where applicable — one-half of condo fees. Optimally, that total figure will represent less than 35% of the would-be borrower’s income.

Of course, most Canadians carry one or more kinds of consumer debt besides their mortgages, and so it’s necessary to determine their cost of servicing that total debt as a percentage of income. That figure is their TDS, which is the total of housing expenses (as calculated for purposes of GDS) plus any other debt repayment, including car loans, credit cards, lines of credit, and student loans. Optimally, the total amount of housing costs plus other repayment will be less than 42% of the would-be borrower’s income.

Where a would-be borrower is particularly credit-worthy (e.g., he or she has a reliable source of income and a good credit history), lenders will provide mortgage financing even where the optimal debt ratios indicated above are exceeded. However, the maximum GDS and TDS ratios allowed are, respectively, 39% and 44%.

While the GDS and TDS ratios do provide a reasonable measure of the ability of a prospective borrower to repay funds advanced to him or her, the weakness of those ratios are that they provide only a “snapshot” of the individual’s housing costs and debt repayment costs at a point in time and, more significantly, at current interest rates. As everyone knows, interest rates in Canada are, and have been for several years, at or near records lows and that many Canadians have taken advantage of those low rates. Specifically, as of the first quarter of 2017, the average debt load of Canadian households (including mortgage debt) stood at 167.3% of disposable income.

The combination of those two factors means that Canadian households are, on average, carrying much higher levels of debt (as a percentage of disposable income) and that the cost of carrying such debt is at or near record lows. When, as has recently proven the case, those interest rates begin to rise, such increase has the potential to put Canadian households on financial thin ice. And that possibility is what gave rise to the introduction by the federal government of the “stress test” which might equally well be called the “what-if?” test.

Basically, the stress test requires that lenders assess a would-be mortgage borrower’s ability to manage their debt, not only at current interest rates, but at the higher rates which those borrowers will certainly face sometime during the life of their mortgage. Carrying out a stress test is, in fact, something which financial planners advise clients to do as part of financial planning whenever taking on debt is contemplated. It’s simply prudent (especially where debt is longer term in nature and consequently higher payments resulting from an increase in interest rates is inevitable) to consider, not just whether the debt is manageable at current interest rates, but whether it will remain manageable where those interest rates rise by 1, 2, or 3% — or more. The “stress test” simply creates a requirement out of something that was always a good idea.

It’s true that the application of the “stress test” as interest rates rise will cause more borrowers to be unable to qualify for a mortgage, or will require them to reduce their expectations in terms of the amount of mortgage financing for which they can qualify. But, it’s also the case that would-be borrowers who cannot “pass” a stress test are the very borrowers who would be put most at risk by an increase in interest rates. Where interest rates will be a year or two from now is something that no one — including the Bank of Canada — knows. It is undoubtedly disappointing for would-be borrowers to have to reduce their expectations with respect to the amount of mortgage financing (and therefore the “amount” of house) they can obtain. That scenario is, however, infinitely preferable to one in which they discover down the road that they can no longer afford to carry their mortgage at the higher interest rates then in effect, and are at risk of defaulting on that mortgage and potentially losing their home.

Accounting Technician, Non-Assurance

The Accounting Technician is responsible for providing accounting and income tax services to our small and medium sized clients. Reporting to Partners, Principals and Managers, the Accounting Technician is a self-managed professional motivated to provide clients an outstanding level of client service and to work in a supportive team-based culture.

Key Responsibilities

  •  Preparation of Notice to Reader Engagement working paper files including all required forms, draft financial statements and corporate tax returns
  •  Preparation of regular external filings including GST, T4’s & T5′s
  •  Performing bookkeeping including reconciliations of bank accounts, accounts payable and accounts receivable
  •  Provide support to clients on general questions regarding year end and bookkeeping issues
  •  Responding to CRA enquiries and requests on behalf of clients
  •  Preparation of T1 Personal Income Tax Returns
  •  Compilation and organization of supporting documentation required to prepare income tax returns

Professional Skills and Education

  •  Strong technical expertise in accounting and tax; experience with investment bookkeeping preferred
  •  Two or more years’ experience in a public accounting firm
  •  CPA or post-secondary diploma or certificate in Accounting or equivalent practical experience
  •  Must have experience with income tax preparation
  •  Comfortable working with Caseware® and Taxprep®; proficiency in accounting related software
  •  Prioritizing workload with the flexibility of managing multiple tasks
  •  Strong working knowledge of MS Office suite
  •  Ability to grasp new technology tools as they evolve
  •  Strong communication skills, both verbal and written (grammar, spelling & formatting)
  •  Must be well organized with a high attention to detail
  • Excellent analysis, critical thinking and problem solving skills

If you believe you have what it takes to join the Segal team, we invite you to forward your resume to hr@segalllp.com

Senior Accountant, Assurance

The Senior Accountant, Assurance is responsible to apply sound practices and methodologies to conduct Audit and Review engagements.  Reporting to Partners, Principals and Managers, the Senior Accountant, Assurance leads the fieldwork team, coaches and mentors junior team members and is a self-managed professional motivated to provide clients an outstanding level of client service within a team-based environment.

Key Responsibilities

  • In consultation with the engagement manager plans, organizes and controls multiple responsibilities and resources to achieve Audit, Review and Notice to Reader engagement objectives.
  • Prepares engagement file, financial statements and appropriate income tax returns
  • Monitors multiple projects and deadlines
  • Builds and nurtures strong working relationships with client management and peer client levels
  • Delegates effectively and contributes to a motivated and empowered work team. Shares and transfers knowledge within the team.

Professional Skills and Education

  • CPA, CA or degree qualification and relevant professional accreditation
  • Three or more years’ experience in a public accounting firm
  • Demonstrated technical knowledge and skills with experience in all reporting standards
  • General knowledge of personal and corporate tax
  • Strong interpersonal and relationship building skills
  • Developing strong project management capabilities
  • The ability to coach, motivate and direct a team of people
  • Team player with a positive ‘can do’ approach
  • Creative problem solving and experience in delivery of quality client service
  • Excellent verbal and written communication skills

If you believe you have what it takes to join the Segal team, we invite you to forward your resume to hr@segalllp.com

CRA Suspends Audits on Charities’ Political Activities

072826_Thinkstock_186059084_lores_ABMany Canadians are generous in their gifts to charity, and in return, they may receive tax benefits. In recent months, there’s been some loosening of the restrictions placed on charities, which may be of interest to contributors.

While Ottawa was in the hands of the Conservative Party led by Stephen Harper, the government put strict restrictions the political activities of charities in 2012.

Five years later, Canada Revenue Agency (CRA), under the current Trudeau-led Liberal Party government, said it is suspending audits of political activity by charities. The move comes after recommendations by a panel the CRA commissioned to study the issue. The panel’s 2017 report urges the government to “broaden the ability of registered charities to engage in political activities,” while at the same time maintain “an absolute prohibition on partisan political activities.”

The five-member panel said that one particularly strong message emerging from the feedback it received during consultations was that a lack of clarity meant that some charities view political activities as too risky and engage in self-censorship. Without knowing the exact parameters within which they can operate, and given that the penalty for even an accidental breach of the rules may be deregistration, many charities make a rational choice to avoid or limit the risk.

Furthering a Group’s Charitable Purpose

The panel recommended that a charity’s political activities, whether pressing for a change in government policy or buttonholing a politician, be judged on whether they further the group’s charitable purpose. The panel proposes eliminating current rules that restrict a charity’s political activities to 10% of its resources.

One of the panel’s key recommendations was that the CRA revise its policy guidance to explicitly allow charities to:

1. Provide information to others related to their charitable objects (including the conduct of public awareness campaigns) for the purpose of informing and swaying public opinion. Such information must be truthful, accurate and not misleading.

2. Conduct research, distribute it to others and discuss the research and its findings with the media and others as they see fit.

3. Express opinions on matters relating to their charitable objectives, as long as they draw on research and evidence and don’t impinge on hate laws or other legitimate restrictions on freedom of speech.

4. Encourage keeping or changing law or policy, either in Canada (on any level of government) or outside of Canada.

5. Call on supporters or the general public to contact politicians of all parties to express their support for, or opposition to, a particular law or policy.

6. Make written or verbal statements to elected officials, parties and candidates, and release such materials publically. The adoption of a charity’s policy by a political party doesn’t in itself constitute partisan political activity.

7. Invite competing candidates and political representatives to speak at the same event, or request written submissions for publication, provided that candidates and parties are given an equal opportunity to speak or have their views published.

8. Express their views and offer others opportunities to express their views, on social media or elsewhere provided such platforms are monitored and partisan political messages are removed.

The panel also encouraged the CRA to:

  • Remove the requirement that a charity’s materials must reflect all sides of the argument, and add that they must be fact-based, and
  • Amend CRA Form T3010, Registered Charity Information Return (annual report) to remove the requirement to quantify resources used for political activities, and replace it with one to describe, in narrative form, the nature of the public policy dialogue and development work undertaken.

Expansive View of Charitable Activity

The panel went on to say that, in its view, the CRA could find support for a broader view of what constitutes charitable activity in case law.

For example, the 1999 Supreme Court ruling in Vancouver Society of Immigrant and Visible Minority Women v. Minister of National Revenue supports looking at the activity in the context of a charitable purpose. If a charity calls for a change in the law in furtherance of its charitable purpose — and such activity is subordinate and non-partisan, the panel said it believes the policy could accept it as charitable.

The panel noted that it believed such an expanded view would go a long way in providing clarity to the charitable sector and would enable it to more meaningfully contribute to public policy reform. Moreover, the panel said, it would remove the current disadvantage faced by the charitable sector in relation to for-profit companies, which can advocate in the public policy arena without restriction.

The panel also urged the CRA to list examples of what will be considered partisan political activities to replace the prohibition on both “direct and indirect” partisan political activities, which the panel suggested is highly subjective (particularly “indirect”), and has been the subject of much confusion.

Need for Legal Changes

Feedback on another issue was clear: fundamental legislative change is needed, and new policy or other administrative measures won’t be sufficient. Suggestions from the panel included:

  • Adopt an inclusive list of acceptable charitable purposes in the Income Tax Act that reflects contemporary society, its issues and expectations.
  • Consider the approach of other jurisdictions, some of which have softened restrictions on political purposes.
  • Clarify that public policy activities (for example, research, dialogue, advocacy, and calls to action) are charitable, provided they’re non-partisan and subordinate to a charitable purpose. In other words, accept the Supreme Court of Canada decision from the Vancouver Immigrant Society case and incorporate it in future legislation (that an activity is considered in the context of the charitable purpose).
  • Create a permanent mechanism for consultation with the charitable sector to ensure an ongoing process for developing policy guidance.
  • Enable charities to benefit from social enterprise and social finance models.

The CRA said the suspension of charity audits will be in effect until the government officially responds to the panel’s report.

 

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