GST/HST, tax shelters, and other provisions affecting charities

publication date: Apr 17, 2013
 | 
author/source: Terrance Carter, Karen J. Cooper & Ryan M. Prendergast

In addition to the so-called “First-Time Donor’s Super Credit,” the 2013 Federal Budget (“Budget 2013” also includes other changes affecting charities:

  • the application of HST/GST to paid parking operated by charities;
  • extending the normal reassessment period with regards to tax shelters and reportable transactions;
  • providing for the early collection of 50% of disputed tax, interest and penalties arising from charitable tax shelters;
  • repeating a call for increased transparency and accountability in the charitable sector; and
  • support for the need for social finance, amongst other initiative.

This article provides a brief summary of these other provisions of Budget 2013 that affect charities.

Extension of reassessment period for donors to registered tax shelters

A significant portion of Budget 2013 is focused on increasing the means for balancing the budget. The federal government has taken a hard line on various tax loopholes, particularly those involving tax shelters. Budget 2013 proposes to extend the reassessment period for reportable tax avoidance transactions and tax shelters where the tax shelter’s required information returns have not been filed on time.

Canada Revenue Agency (“CRA”) is permitted to reassess a taxpayer’s return outside of the normal reassessment period of three years in cases of misrepresentation attributable to neglect, carelessness, wilful default or fraud. But the Income Tax Act (“ITA”) currently does not provide a similar extension in cases where a tax shelter’s information return has not been filed or has been filed late. As a result, CRA’s ability to audit the tax shelter is prejudiced by the application of the shorter reassessment period.

In response, Budget 2013 proposes to extend the normal reassessment period by a further three years after the date that the information return has been filed (for a total of six years). This extended reassessment period will apply to all future taxation years that end after March 21, 2013.

Early collection of amounts owing from donation tax shelters

Generally, CRA has been successful in the Tax Court of Canada and the Federal Court of Appeal in recent years when challenging disputed charitable donation tax credits or deductions claimed by donors involved in donation tax shelters. However, Budget 2013 notes that this success often comes only after years of litigation. As a result, CRA has experienced significant delays in collecting any taxes owed, together with fines and penalties assessed against the donor.

In response, Budget 2013 states that it hopes to “discourage participation in questionable charitable donation tax shelters” by permitting CRA to proceed with collection actions on 50% of the disputed tax, interest or penalties which result from the disallowance of a donation claimed with respect to a tax shelter, even before the ultimate liability of the donor has been determined through the objection and appeal process.

While there are many donors who have turned a blind eye and become involved in tax shelter schemes that were obviously too good to be true, there is an arguable unfairness whereby CRA is permitted to collect related taxes, fines, and penalties before all routes of appeal have been exhausted. There are no similar provisions under the ITA for other potentially disputed taxes. Given the recent decision of Guindon v. The Queen stating that monetary penalties against third parties under the ITA can be equated with criminal sanctions, the constitutionality of these proposed amendments to the ITA is questionable. The underlying policy rationale, however, is understandable in that the intent is to discourage taxpayers from participating in tax shelters.

Budget 2013 states that these measures will apply to amounts assessed for the 2013 taxation year and all subsequent taxation years.

New rules concerning collection of GST/HST on paid parking

Budget 2013 states that it is unclear whether many public sector bodies (“PSB”), i.e., municipalities, universities, public colleges, school authorities, hospital authorities, charities, non-profit organizations or government entities are exempt from GST/HST in relation to the provision of paid parking. In this regard, Budget 2013 states that, “[I]t was never intended that this provision would exempt a commercial activity, such as paid parking provided on a regular basis by a PSB that may compete with others providing paid parking services.”

As such, Budget 2013 states that the Excise Tax Act will be amended to clarify that PSBs are not exempt from collecting and remitted HST/GST on supplies of paid parking made by way of lease, license or similar arrangement in the course of a business carried on by the PSB. Budget 2013 specifically identifies parking facilities operated by municipalities or hospitals in this regard. In an effort to be consistent, Budget 2013 also specifically states that supplies of paid parking made by other charities will also not be exempt.

Many charities, including hospitals and universities, will now need to ensure that they are registered for GST/HST purposes and are collecting and remitting all taxes owed on any parking facilities that they operate in the course of a business. This proposed change will burden many charities and smaller PSBs which are not at present registered. They will now need to determine if their paid parking services require them to register for GST/HST purposes.

The proposed amendments to the Excise Tax Act only apply where the supply is made “in the course of a business.” Whether the provision of paid parking is in fact made in the course of a business would need to be determined on a case by case basis.

These proposed measures apply to all supplies of paid parking made after March 21, 2013.

Repeated focus on transparency and accountability

In addition to the proposed amendments described above, Budget 2013 also announces that the federal government will encourage more donations and further enhance public awareness, reduce red tape, and increase transparency and accountability in the charitable sector, by working with organizations in the sector, including Imagine Canada. This announcement has been repeated in previous budgets.

Federal government recommits to supporting social finance

Budget 2013 states that the federal government will continue to “bring together key players in the non-profit and private sectors to develop investment-worthy ideas and tap the potential of the social finance marketplace to promote economic growth and prosperity.”

Amalgamation of the Department of Foreign Affairs and International Trade with CIDA

Budget 2013 announces that the Department of Foreign Affairs and International Trade and the Canadian International Development Agency will be amalgamated into the new Department of Foreign Affairs, Trade, and Development (DFATD). There will continue to be two ministerial positions for the trade and development functions. Their responsibilities and roles will now be prescribed in forthcoming legislation.

While the stated reasoning for the amalgamation is to increase the ability of the new DFATD to “leverage the synergies resulting from the amalgamation to maximize the effectiveness of the resources available to deliver development and humanitarian assistance.” it is questionable why it is necessary or even advisable to tie commercial trade policy with the objectives of international aid.

Additional funding for Nature Conservancy of Canada and others

Finally, Budget 2013 proposes funding for a number of charitable organizations, including a grant of $20 million for the Nature Conservancy of Canada, a charitable private land conservation organization, in order to allow it to continue to conserve ecologically sensitive land under the Natural Areas Conservation Program. This funding will also be matched by $2 million in new funding from other unnamed sources.

Budget 2013 emphasises the federal government’s commitment to preserving the natural environment. This might be considered indirect response to the Standing Committee on Finance Report’s recommendation to eliminate taxable capital gains on donations of real property, since doing so would substantially decrease the effectiveness of this program. As well, this grant is in keeping with previous budgets, whereby the federal government provided $225 million to the NCC and other charities for this program in 2007.

Conclusion

Budget 2013 could have gone further in encouraging charitable donations by adopting the Stretch Tax Credit as proposed by Imagine Canada. However, the “First-Time Donor’s Super Credit,” limited as it is, and the inclusion of several specific subsector grants, are steps in the right direction and show the federal government’s willingness to recognize the charitable sector’s importance even during a period of fiscal restraint.

Other than the provisions extending the reassessment period with regards to tax shelters and reportable transactions, as well as allowing an early 50% collection of disputed tax, interest and penalties involving tax shelters (both of which few would dispute as a matter of policy), the other provisions of Budget 2013 generally reflect a statement by the federal government that they intend to support the charitable sector in Canada.

However, as is often said, “the proof is in the pudding,” and the charitable sector will want to carefully monitor and continue to pressure the federal government to ensure that it follows through with its stated intentions over the coming year.

Terrance Carter is the managing partner with Carters Professional Corporation and is counsel to Fasken Martineau DuMoulin LLP on charitable matters and editor of charitylaw.ca. Mr. Carter can be reached at tcarter@carters.ca.

Karen J. Cooper, B.Soc. Sci., LL.B., LL.L, TEP, is a partner with Carters Professional Corporation, practicing charity and not-for-profit law in the firm’s Ottawa office. Ms. Cooper can be reached at kcooper@carters.ca.

Ryan M. Prendergast, B.A., LL.B., is an associate practicing charity and not-for-profit law with Carters Professional Corporation, and can be reached at rprendergast@carters.ca



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