Weird Election; Weird Budget

One of the after effects of the Conservative majority is that their budget will ultimately be passed into law. The flow-through donation shelter, as we knew it, is gone.  

Taking away the capital gain exemption on a gift of marketable securities (mining flow-through shares) increases the cost of donation significantly. In Quebec, however, there is a capital gains exemption on a disposition of strategic investment shares and so the negative repercussions of the budget are only half felt in Quebec.  

As a result, we have started to see Quebec mining flow-throughs being marketed here in Montreal where the end cost of the donation is 15%. Quebec promoters are hoping to meet with Quebec Finance to confirm the tax treatment. We will keep you informed.

Disbursement Quota Changes: What Does it Really Mean?

The recent Federal Budget included a portion labeled "Helping Charities: Disbursement Quota Reform". (There were no other charity issues dealt with-the ability to do mining flow-through gifting shelters was not blocked; although we have to wait for the Quebec budget to ensure Quebec's incentives continue.)

The critical 80/20 rule is gone. Charities were required to spend at least 80% of their charitable receipt income on charitable activities. No longer. We will have to spend annually 3.5% of accumulated assets but the rest is gone-no ten-year rules, enduring property, etc.

The 80/20 was not working. Small charities had difficulty making the rules work. This was true for larger charities as well, if their fundraising events or mail campaigns were not making it. How many fundraising dinners announce totals of $500,000 but the costs of the event are half of that?

Thus, CRA was not really applying the 80/20 rule. If you didn't make it, you probably were not going to be bothered.

But the cost of fundraising is a concern. Last year, CRA released a paper on fundraising expenses. Simplistically up to 35% is acceptable, 35-50 questionable and over 50% problematic. Of course if 35% is acceptable then the 80/20 rule became inoperable, so effectively it had to be removed from the law.

In addition, the paper attempted to define what is considered a fundraising expense and what is not. There were charities that were claiming their direct mail pieces were educational and thus the costs of the fundraising program were charitable activities. So presumably the paper liberalized the 80/20 rule, by accepting 35%, but also set standards for what constitutes a cost.

So the 80/20 rule had to go. However, what is left is a vacuum. There is no legal stick to curb excesses. Yes, CRA was not applying the 80/20 rule, but if it saw a clearly terrible situation which it wanted stopped it could apply the rule to deregister a charity or threaten it.

At the end of the day
the "paper" is exactly that- 
a paper. It is not law.

A final note: I have to believe that we are going to see more required detail on the charity tax return outlining costs of particular fundraising events. CRA's audits focus mostly on the propriety of receipts given. To move to evaluating the costs of fundraising programs may be far past the current ability of CRA staff and quite time consuming.

Bottom line:

So I have mixed feelings about this budget change. The 80/20 rule had to go - but I believe we are now open to increased fundraising excesses. Something will have to give.