Budget 2015: striking a balance in an election year

Finance Minister Joe Oliver faced formidable challenges, both economic and political, in delivering his first Budget. In a time of depressed oil prices, and mere months ahead of the next federal election, it appears he felt it was imperative to follow through with prior commitments to balance the budget, provide “goodies” for as many Canadians as possible to consider when heading to the polls, and continue the emphasis of prior budgets on tax integrity and fairness measures.

On the first point, Budget 2015 announces that the books are balanced and projects a surplus of $1.4 billion in 2015-2016.

On the “goodies” front, Budget 2015 has something for just about everyone, from students to seniors and those in between. There is an increase in the tax-free savings account (TFSA) contribution limit and a reduction in the required minimum withdrawals for registered retirement income funds (RRIF). There is also a new home accessibility tax credit for disabled persons, as well as an extension to the compassionate care benefit under the employment insurance (EI) program. Small businesses will benefit from an increase in the small business deduction phased in over four years, while manufacturers have an incentive to invest in new manufacturing and processing equipment over the next decade through an accelerated capital cost allowance (CCA) deduction. Charities stand to benefit from a proposed capital gains exemption where the proceeds from the sale of private corporation shares or real estate are donated to qualified donees, as well as a measure permitting charities to invest in certain limited partnerships. Even farmers and fishers benefit, with an increase in the capital gains exemption for qualified farm and fishing property to $1 million.

Despite the “goodies,” or perhaps to pay for them, Budget 2015 maintains the focus of the Government of Canada over the last several years on tax fairness and integrity. Since 2006, the Government of Canada has introduced over 90 measures addressing so-called “tax loopholes,” clarifying tax rules, targeting perceived international tax avoidance and generally improving the integrity of the tax system. Budget 2015 is no exception. There are new rules dealing with “synthetic equity arrangements,” an overhaul of the existing anti-avoidance rule that prevents the conversion of taxable capital gains into tax-free inter-corporate dividends and a second volley targeting captive insurers. As well, Budget 2015 reaffirms the Government of Canada’s commitment to the ongoing international efforts of the Organisation for Economic Co-operation and Development (OECD) and G-20 relating to base erosion and profit shifting (BEPS), being measures to counter the shifting of profits to low-tax jurisdictions. Budget 2015 also affirms Canada’s commitment to the G-20 proposal for automatic information exchange on tax accounts (to begin in 2018), which will no doubt involve substantial compliance obligations on Canadian banks and other financial institutions. By the same token, Budget 2015 proposes some relief in the form of a simplified T1135 foreign property reporting form for taxpayers with specified foreign property having a cost of less than $250,000.

Tax-Free Savings Accounts

As anticipated, Budget 2015 proposes to increase the annual contribution limit for a TFSA. First introduced in Budget 2008, TFSAs are tax-efficient savings accounts where contributions are not tax deductible, but investment income accrues free of tax and withdrawals are not subject to tax. The annual contribution limit is indexed to inflation, with the current limit being $5,500. Budget 2015 proposes to increase the contribution limit to $10,000 effective January 1, 2015 with no further indexing for inflation. Any unused contribution room may be carried forward for use in subsequent years. While often criticized as a savings vehicle that primarily benefits wealthy Canadians, Budget 2015 notes that half of the approximately 11 million TFSAs were established by Canadians earning less than $42,000 per year.

Registered Retirement Income Funds

Budget 2015 proposes to change the rules that require minimum amounts to be withdrawn from a RRIF each year and included in the annuitant’s income. Currently, a taxpayer’s registered retirement savings plan must be converted to a RRIF, or used to purchase an annuity, by the end of the year in which the annuitant attains the age of 71. Commencing the following year, minimum amounts must be withdrawn and included in the annuitant’s income. The existing minimum withdrawals are based on notional rates of return that are higher than historic rates. As a result, Budget 2015 proposes to decrease the annual minimum withdrawals more in line with long-term investment returns and expected rates of inflation. These changes are proposed to be effective for 2015 and subsequent years, with recontributions permitted for those who, in 2015, withdraw more than the proposed new minimum.

Focus on Small Businesses

Decrease of the Federal Tax Rate for Small Businesses

Budget 2015 proposes to increase tax incentives for small businesses by reducing federal tax rates for certain Canadian-controlled private corporations (CCPCs) and their shareholders. Currently, the first $500,000 of active business income earned by a CCPC is subject to federal tax at a rate of 11 per cent by means of the small business deduction. Budget 2015 proposes to phase-in one-half per cent cuts in the tax rate, commencing January 1, 2016, to reduce the rate to 9 pe rcent effective January 1, 2019. Corresponding adjustments are proposed to be made to the dividend gross-up and tax credit mechanisms, with the aim of ensuring that income earned in a corporation and paid as dividends to an individual will be subject to the same amount of tax as if earned directly by the individual. Budget 2015 estimates that over the foregoing period, these changes will reduce taxes for small businesses and their owners by $2.7 billion.

Consultation on the Scope of the Small Business Deduction

CCPCs may only claim the small business deduction on active business income. Generally this includes income earned from an adventure or concern in the nature of trade (i.e., operating a business venture), but does not include income derived from property (e.g., dividends, royalties and rent) or income derived from the operation of a personal services corporation (unless the CCPC has more than five full-time employees or meets other conditions). The result is that some businesses which earn income from property are entitled to claim the small business deduction.

The Department of Finance plans to review circumstances where income from a business, the principal purpose of which is to earn income from property, should qualify for the small business deduction. In this regard, the Department of Finance notes that stakeholders have expressed concerns regarding the application of the small business deduction to certain businesses, such as self-storage facilities and campgrounds.

Capital Gains Stripping – Subsection 55(2) Overhaul

Subsection 55(2) is an anti-avoidance provision that applies to certain tax planning transactions referred to as “capital gains stripping.” The planning technique typically involves reducing a capital gain by paying a deductible inter-corporate dividend. Subsection 55(2) can apply to re-characterize such a dividend as a capital gain if one of the purposes of the dividend was to significantly reduce the amount of the capital gain that would have been realized on the disposition of any share.

This subsection is already one of the most complex anti-avoidance provisions in Canadian tax law, prompting one Judge to state, “It surpasses my imagination that anyone considers language such as this to be capable of intelligent understanding…”1 However, Budget 2015 proposes to further extend subsection 55(2) to ensure that it also applies to dividends that create or increase an unrealized capital loss (which can be used to shelter a capital gain on another property).

The proposal in Budget 2015 appears to be in response to the recent decision of the Tax Court of Canada in D&D Livestock. In that case the Court allowed a taxpayer to rely on an exception to subsection 55(2) to the taxpayer’s advantage. The exception permits capital gains stripping to the extent the dividend paid is attributable to underlying previously taxed income of the corporation (referred to as “safe income”). The taxpayer used stock dividends (which the Court found did not reduce safe income) to effectively double-count the safe income of one of its subsidiaries and reduce the capital gain on a subsequent sale. Budget 2015 proposes changes to subsection 55(2) to ensure that the amount of a stock dividend will reduce safe income in circumstances similar to those in the D&D Livestock case.

In extending this anti-avoidance rule, Budget 2015 proposes replacing subsection 55(2) and adding new subsections 55(2.1) to (2.4) applicable to dividends received after April 20, 2015. The new provisions will generally apply to re-characterize a deductible inter-corporate dividend as a capital gain if one of the purposes of the dividend payment (or receipt of the dividend) is to either effect a significant reduction in the fair market value of any share or to effect a significant increase in the cost of properties of the dividend recipient (regardless of whether the dividend reduces a capital gain).

Budget 2015 also proposes amending an existing exception for certain related party transactions by limiting the exception to dividends deemed to be received on the redemption, acquisition or cancellation of a share.

Synthetic Equity Arrangements

The existing dividend rental arrangement rules are intended to deny the deduction for an inter-corporate dividend received as part of an arrangement under which a person other than the corporate shareholder bears the risk of loss or enjoys the opportunity for gain or profit with respect to the share.

A typical dividend rental arrangement would include an arrangement whereby a corporation borrows a share in order to receive a tax-free inter-corporate dividend. The lender of the share under such an arrangement, such as a tax exempt pension fund, would be indifferent as to whether it receives the dividend or an equivalent fee from the borrower for the use of the share. However, under the existing dividend rental arrangement rules the deduction for the dividend received by the corporate borrower in this type of arrangement will be denied.

Certain taxpayers, such as financial institutions, have been taking the position that the existing dividend rental arrangement rules do not apply to a variety of “synthetic equity arrangements.” Under these types of arrangements the financial institution is the legal owner of the shares but, through the use of equity derivative agreements, the risk of loss or opportunity for gain related to the shares is transferred to a counterparty, which is generally an entity that is not subject to Canadian income tax (a “tax indifferent investor”).

Under these arrangements the financial institution is generally required to transfer the economic benefits of the dividend by making a “dividend equivalent payment” to the counterparty. Since the amount of the dividend equivalent payment is the same as the amount of the dividend received the financial institution suffers no economic loss. However, for income tax purposes the financial institution realizes a loss on the arrangement because the amount of its dividend equivalent payment is tax deductible. Since these arrangements result in a tax loss for the financial institution with no offsetting tax liability by the tax indifferent investor, they result in an erosion of the Canadian tax base.

Budget 2015 proposes to modify the dividend rental arrangement rules to deny the inter-corporate dividend deduction on dividends received by a corporate taxpayer, such as a financial institution, in respect of which there is a synthetic equity arrangement. For this purpose a synthetic equity arrangement will exist where the taxpayer enters into an agreement that provides the counterparty with substantially all of the risk of loss and opportunity for gain or profit in respect of the share. An exception to the rules will apply where the taxpayer can establish that no tax indifferent investor has all or substantially all of the risk of loss or opportunity for gain or profit in respect of the share.

The proposed rules will apply to dividends that are paid or become payable after October 2015. The rules will not apply in circumstances where the derivative agreement is traded on a recognized derivatives exchange, unless it is reasonable to consider that the taxpayer knew or ought to have known that the counterparty to the agreement was a tax indifferent investor. This proposal represents one of the most significant tax measures in Budget 2015 as the Government of Canada expects to recoup a total of $1.24 billion from these changes over the next four years.

Budget 2015 also proposes an alternative synthetic equity arrangement regime under which the dividend rental arrangement rules would apply regardless of whether the counterparty is a tax indifferent investor. This alternative regime would be less complex, but it would have broader scope. The Department of Finance has invited stakeholders to submit comments by August 31, 2015 as to whether this broader alternative proposal should be adopted.

Manufacturing and Processing Machinery and Equipment

Machinery and equipment acquired primarily for use in Canada for the manufacturing or processing of goods for sale or lease are generally included in Class 43 of Schedule II of the Regulations and qualify for a CCA rate of 30 per cent calculated on a declining-balance basis. Where the acquisition occurs after March 18, 2007 and before 2016, the machinery and equipment may qualify under Class 29 for an accelerated CCA rate of 50 per cent calculated on a straight-line basis, and the “half-year rule” does not apply to limit the CCA in the year the asset is first available for use.

Budget 2015 proposes that such machinery and equipment acquired after 2015 and before 2026 be included in new Class 53 for CCA purposes. Like Class 29, new Class 53 will provide for an accelerated CCA rate of 50 per cent, but this rate will be applied on a declining-balance basis rather than on a straight line basis and will be subject to the “half-year rule.”

Machinery and equipment included in new Class 53 and acquired primarily for use in Atlantic Canada or the Gaspé Peninsula will be “qualified property” for the purposes of the Atlantic investment tax credit.

Foreign Assets Reporting Requirements

Canadian taxpayers (as well as certain partnerships) that own specified foreign property with a cost of more than $100,000 must file a Foreign Income Verification Statement (Form T1135) with the Canada Revenue Agency (CRA). Specified foreign property generally includes funds and investments in entities outside Canada, but excludes property used exclusively in an active business, real estate and other personal-use property, as well as shares and debt of a foreign affiliate. In 2013, the CRA introduced a revised Form T1135 which required significantly more information from taxpayers resulting in an increased compliance burden. Following negative feedback from the tax community on these new compliance burdens, Budget 2015 proposes to introduce a simplified form (currently being developed by the CRA) for taxation years after 2014 if a taxpayer’s total cost of specified foreign property is less than $250,000 throughout the year. The current requirements will continue to apply where the total cost is $250,000 or more.

Update on Tax Planning by Multinational Enterprises (BEPS)

Tax planning by certain multinational enterprises (MNEs) has recently attracted global attention because of the very low effective tax rates achieved. Governments and tax policy makers, including the Government of Canada, the OECD and the G-20, are reacting. For example, the OECD launched a project aimed at addressing BEPS strategies used by MNEs to reduce or avoid taxes. The BEPS project has included a number of working groups each focusing on different aspects of governmental concern, and resulted in a “BEPS Action Plan” released by the OECD in July, 2013.

In this context, Budget 2014 previously announced that the Government of Canada would be launching a consultation process and, more specifically, would be seeking input on the following questions:
• What are the impacts of international tax planning by MNEs on other participants in the Canadian economy?
• Which of the international corporate income tax and sales tax issues identified in the BEPS Action Plan should be considered the highest priorities for examination and potential action by the Government of Canada?
• Are there other corporate income tax or sales tax issues related to improving international tax integrity that should be of concern to the Government of Canada?
• What considerations should guide the Government of Canada in determining the appropriate approach to take in responding to the issues identified – either in general or with respect to particular issues?
• Would concerns about maintaining Canada’s competitive tax system be alleviated by coordinated multilateral implementation of base protection measures?

In Budget 2015, the Government of Canada acknowledges the value of the input received from the Canadian tax community and looks forward to the conclusion of the BEPS project as well as future discussions with the international community on the implementation of its recommendations.

Reduced Payroll Withholding Requirements for Non-Resident Employers

Historically, one of the biggest impediments for non-residents doing business in Canada has been Canada’s Regulation 102 payroll withholding requirements. Budget 2015 has taken a significant step in alleviating this procedural compliance burden for non-residents with limited employee activity in Canada.

Both resident and non-resident employers are required to remit source deductions to the Government of Canada in respect of the employee’s income tax, as well as the employer and employee portions of Canada Pension Plan (CPP) contributions and EI premiums. Non-resident employers are generally relieved of CPP and EI requirements if the employee is resident in a country with which Canada has a Reciprocal Agreement on Social Security. However, the compliance burden relating to income tax withholdings is a heavy one. Since there is no de minimis rule in the Income Tax Act (ITA) limiting Canada’s right to tax a non-resident employee’s income, the non-resident employer and employee are subject to withholding requirements even if the employee’s time in Canada is limited to a few days. In addition, even where a tax treaty exempts the employee’s income from Canadian tax, in the absence of a waiver, Regulation 102 still requires the employer to withhold. Budget 2015 looks to reduce the administrative burden for income tax withholdings where the non-resident employer and employee meet certain conditions.

The existing system allows non-resident employers to obtain waivers to relieve the obligation to withhold. However, the current waiver system is inefficient as it is limited to specific employees for specific periods and can result in repeated administrative burdens where numerous employees are sent to Canada for short periods of time. Budget 2015 proposes to eliminate the need to provide employee-specific information by allowing the Minister to certify an employer for a specified period of time if the employer has applied in prescribed form and meets certain conditions. Notably, under the proposed conditions the employer must be resident in a country with which Canada has a tax treaty and the employer must not carry on business in Canada through a permanent establishment. If the employer is a partnership, at least 90 per cent of the partnership’s income for the fiscal period that includes the time of the payment must be allocated to persons that are resident in a treaty country.

Payments from a “qualifying non-resident employer” will not be subject to income tax withholding requirements if the employer is certified and the payments are made to a “qualifying non-resident employee.” An employee will be a “qualifying non-resident employee” with respect to a payment if the employee is exempt from Canadian income tax with respect to the payment because of a tax treaty and is not present in Canada for 90 days or more in any 12-month period that includes the time the payment is made.

This new certification process, which applies to payments made after 2015, will undoubtedly reduce the burden on employers who send employees to Canada for short durations. However, even if the employees of a certified employer are all qualifying non-resident employees, the employer remains responsible for opening a payroll account with the CRA and for filing T4 slips and complying with other reporting requirements for those employees. In the case of large partnerships, it is unclear whether the requirement to show that 90 per cent of the partnership’s income is allocated to residents of treaty countries will be an administrative nightmare or easily satisfied (e.g., with a signed attestation from an authorized representative of the partnership). While the proposed changes are welcome, non-resident employers will continue to hope for additional measures to further reduce their compliance burden.

Captive Insurance

The Canadian foreign accrual property income (FAPI) regime contains anti-avoidance rules to prevent Canadian taxpayers from shifting income from the insurance of Canadian risks to offshore jurisdictions.

Taxpayers circumvented the FAPI rules through “insurance swap” transactions by transferring certain Canadian risks (i.e., risks in respect of persons resident in Canada, property situated in Canada or businesses carried on in Canada) to foreign affiliates. Budget 2014 introduced amendments to the existing anti-avoidance rules to curtail these sophisticated tax planning arrangements.

However, new tax-planning arrangements have emerged which may fall outside of the scope of the 2014 amendments. Under these alternative arrangements, a Canadian taxpayer’s foreign affiliate may receive consideration with an embedded profit component (based upon the expected return on the pool of Canadian risks) in exchange for ceding its Canadian risks. While such arrangements may be caught by existing anti-avoidance legislation or other rules in the ITA, Budget 2015 proposes legislation to confirm that such arrangements result in FAPI with a view to ensuring that a Canadian taxpayer’s profits from the insurance of Canadian risks will remain taxable in Canada. In particular, the anti-avoidance rules will be amended so that a foreign affiliate’s income in respect of the ceding of Canadian risks is included in its FAPI. Where the affiliate receives a portfolio of insured foreign risks as consideration for ceding Canadian risks, the affiliate is considered to have earned FAPI in an amount equal to the difference between the fair market value of the Canadian risks ceded and the affiliate’s costs of acquiring those Canadian risks.

Interestingly, while this measure applies to taxation years beginning on or after April 21, 2015, the Government of Canada invites interested stakeholders to submit comments on this measure by June 30, 2015.

Automatic Exchange of Tax Information

Budget 2007 signaled the Government of Canada’s commitment to including information exchange provisions in all future tax treaties as well as in amendments to existing treaties and in tax information exchange agreements (TIEAs) with non-treaty jurisdictions. Since then, Canada’s tax treaty and TIEA network has expanded significantly. Canada has also signed the OECD Convention on Mutual Administrative Assistance in Tax Matters, joining over 60 other countries that have signed to date. Budget 2014 focused on Canada’s February 5, 2014 intergovernmental agreement with the US regarding the application of the US Foreign Account Tax Compliance Act (FATCA), which led to the addition of Part XVIII to the ITA.

Budget 2015 continued this trend by confirming Canada’s intent to implement a common reporting standard for the automatic exchange of information developed by the OECD. In November 2014, Canada and the other G-20 countries endorsed the new common reporting standard and committed to a first exchange of information by 2017 or 2018. This is part of the Government of Canada’s commitment to combating international tax evasion and aggressive tax avoidance.

Under the new common reporting standard, foreign tax authorities will provide information to the CRA relating to financial accounts in their jurisdictions held by Canadian residents. The CRA will provide corresponding information to the foreign tax authorities regarding accounts in Canada held by residents of their jurisdictions. Financial institutions in Canada will be required to implement due diligence procedures to identify accounts held by non-residents and report certain information relating to these accounts to the CRA. However, financial institutions will not be required to report on accounts held by residents of Canada with foreign citizenship. Safeguards will be put in place to protect taxpayer confidentiality and ensure that the exchanged information is used only by tax authorities and only for tax purposes.

Budget 2015 proposes to implement the new standard on July 1, 2017, however the first exchange of information is not slated to occur until 2018. As of the implementation date, financial institutions will be expected to have procedures in place to identify accounts held by residents of other countries and to report the required information to the CRA. The CRA will formalize exchange arrangements with other jurisdictions once it is satisfied that each jurisdiction has the appropriate capacity and safeguards in place. Once the exchange arrangements are finalized, the information will begin to be exchanged on a reciprocal, bilateral basis. Draft legislative proposals will be released for comments in the coming months.

Penalty for Repeated Failure to Report Income

Budget 2015 proposes that the penalty assessed for repeated failures to report income should not exceed the gross negligence penalty for making a false statement or omission knowingly or in circumstances amounting to gross negligence. Under existing legislation, when a taxpayer fails to report income in a taxation year and in any one of the three preceding taxation years, penalties assessed under subsection 163(1) are based on 10 per cent of the unreported income (which becomes 20 per cent if the CRA imposes a parallel 10 per cent provincial penalty). Even though this penalty applies for a simple omission, because it is calculated as a percentage of unreported income rather than tax payable, it often exceeds the gross negligence penalty. The gross negligence penalty is generally equal to 50 per cent of the understatement of tax relating to the omission. Budget 2015 addresses this anomaly for 2015 and subsequent taxation years by limiting the amount of the subsection 163(1) penalty to the lesser of:
• 10 per cent of the unreported income, and
• An amount equal to 50 per cent of the difference between the understatement of tax relating to the omission and the amount of any tax paid in respect of the unreported amount.

Alternative Arguments to Support Assessments

Budget 2015 proposes that the CRA and the courts may increase or adjust any component of an assessment that is under objection or appeal at any time, provided that the total amount of the assessment does not increase. Subject to limited exceptions, it is a long standing principle that the CRA, after the expiration of the normal reassessment period, may not appeal its own assessment by seeking to assess a higher amount of tax. Therefore, courts cannot render a decision to increase the amount of tax assessed. While there is currently no draft legislation to implement this proposal, it is clear that it is intended to overturn the decision in a recent court case which interpreted this principle in a manner favourable to taxpayers. The court held that, rather than considering only the total tax assessed, instead each component (or source) of income had to be individually considered and the amount of the assessment in respect of each source of income could not increase. The Crown’s position was that the court’s interpretation would undermine the integrity of Canada’s self-assessing system by preventing errors in the assessing process from being corrected on appeal and thereby potentially creating windfalls for non-compliant taxpayers. While it remains to be seen how the ITA will be amended to address these perceived concerns, this is another example of the Department of Finance seeking to quickly amend the ITA to counter what the CRA considers an adverse court ruling.

Donations Involving Private Corporation Shares or Real Estate

The tax treatment of registered charities and other qualified donees in Canada is relatively generous compared to the treatment provided by other countries. Budget 2015 introduces three new measures that provide additional support for charities, including a new exemption from capital gains tax.

Currently, donations to qualified donees give rise to donation tax credits (where the donor is an individual) or deductions (where the donor is a corporation). In addition, donations of publicly listed securities to qualified donees are exempt from capital gains tax, and donations of ecologically sensitive land and cultural property to certain qualified donees are also exempt from capital gains tax.

The charity sector in Canada has been lobbying for several years to extend some form of capital gains tax exemption to donations of private company shares and real estate. Budget 2015 introduces measures that respond to these requests.

The proposed amendments will apply where a taxpayer donates some or all of the proceeds from the disposition of private company shares or real estate. If certain conditions are met, the taxpayer’s capital gain in respect of the portion of the proceeds donated to the qualified donee will be exempt from tax. The exempt portion of the gain will be determined using the ratio of the donated cash to the total proceeds. For the exemption to apply two conditions must be satisfied:
• The purchaser of the shares or real estate must be arm’s length to the taxpayer and to the qualified donee, and
• The donation of the cash proceeds must occur within 30 days of the disposition.

There will be anti-avoidance rules to ensure that the exemption is not misused. The exemption will not be available if, within five years after the disposition:
• The taxpayer or a person who does not deal at arm’s length with the taxpayer reacquires the shares (or shares substituted for them) or the real estate, or
• The shares are redeemed and at the time of redemption the taxpayer does not deal at arm’s length with the corporation.

Investments by Registered Charities in Limited Partnerships

Under the ITA, private foundations are prohibited from carrying on any business, and charitable organizations and public foundations are prohibited from carrying on unrelated businesses. Under the ITA and at common law, a limited partner is considered to be carrying on the business of the partnership. As a consequence of these rules, if a registered charity wants to invest in a publicly traded limited partnership or in social impact investment vehicle organized as a limited partnership, it must use a blocker, such as a trust, to own the partnership interest.

Budget 2015 proposes to amend the ITA by making it possible for a registered charity to own an interest in a limited partnership directly. Subject to a number of conditions, a registered charity will not be considered for tax purposes to be carrying on the business of a partnership of which it is a member. For the new rule to apply, the partnership must be a limited partnership, the registered charity must deal at arm’s length with the general partners, and a 20 per cent test will apply. In particular, the fair market value of the registered charity’s interest in the limited partnership, together with the fair market value of the interests of persons who do not deal at arm’s length with the charity, cannot be more than 20 per cent of all partnership interests.

There will also be consequential amendments to other rules whose premise is that registered charities cannot own interests in limited partnerships. The excess corporate holding rules will be amended to apply where the ‘excess’ corporate holding is held through a limited partnership. Similarly, the non-qualifying securities rule and the loan back rules will apply to donations of interests in limited partnerships, as well as donations of shares and obligations.

Donations to Foreign Charities

Currently, under the ITA, the Minister of National Revenue, in consultation with the Minister of Finance, may designate a “foreign organization” as a qualified donee for a 24 month period that includes the time when the Government of Canada has made a gift to the foreign organization if:
• The foreign organization is not resident in Canada, and
• The Minister of National Revenue is satisfied that the foreign organization is carrying on disaster relief activities, providing humanitarian aid or carrying on activities in the national interest of Canada.
Budget 2015 proposes to amend this rule to make it applicable to “foreign charities,” not just “foreign organizations.” It appears that the proposed amendment is intended to allow foreign charitable foundations to become qualified donees, that is, foreign charities that are passive, as well as foreign charities that are active.