TAX MATTERS - New Canadian tax changes create unmanageable burden for charities
Changes to tax law coming into effect Jan. 1, 2024, which add more tax to high-income Canadians who choose to make large donations of securities to charities in the country. To add insult to injury, other recent changes will cause many of those donations – and in fact donations of many types, and even those of lesser amounts – to create a significant and unmanageable burden for charities.
The rules that create this burden were part of Bill C-32, which became law on Dec. 15. Make no mistake; this could close the doors of some charities. Let me explain.
The Rules
Just as individuals and corporations are required to file tax returns each year, trusts are also required to file an annual income tax and information return (called a T3 return) – with some exceptions.
Bill C-32 included new trust reporting rules, which expand the number of trusts required to file each year, including “express trusts” (trusts created knowingly or intentionally by a person). The new rules apply to trust year-ends of Dec. 31, 2023, or later. The penalties for failing to file are big, amounting to the greater of $2,500 or 5 per cent of the value of the trust property.
Here’s the problem: Many people donate money to charities with instructions to hold the funds and use them for certain purposes, at certain times, or under certain conditions. Many of these arrangements are considered to be express trusts.
Take an example where a person donates to a university where the funds are to be held to provide annual scholarships to students who need financial assistance. Or consider a donor who sets up a “donor-advised fund” (DAF) where a donor contributes money to a charitable foundation and then, each year, advises it which charities should receive grants from the DAF.
Any time money is donated with time or use restrictions or conditions on use of the funds, it will often be the case that an express trust exists. Experts call these “internal express trusts” because they are internally administered by the charity (as opposed to being the charity itself).
The Impact
So, if a charity holds funds that are express trusts, the new rules require the charity to file a separate T3 return for each trust, along with a new Schedule 15 to accompany each T3.
