Monday, May 4, 2015

2015 Budget: Good News for Charities with Endowment Funds

Some charities (such as charitable foundations) have endowment funds that are invested to produce income that can then be used for charitable purposes.  The 2015 Budget provides a greater range of investment possibilities for those funds by making it easier to invest in limited partnerships.

Traditionally, partnerships were closely-knit groups of individuals who carried on business together.  For many years now, the partnership concept has morphed into much more complicated business structures in order to take advantage of tax rules that apply to partnerships.  Many partnership units are traded on stock exchanges in the same way that corporate shares are traded.  Even so, each partner is considered to be carrying on the partnership business.  Usually, partnerships that are traded on stock exchanges are limited partnerships so that investors are not fully liable for the debts of the partnerships and are therefore more like shareholders of a corporation.

Income tax rules restrict the types of businesses that a charity can carry on.  As even a limited partner of a partnership is considered to be a participant in the partnership business, this limits the types of limited partnership investments that a charity can make.

Effective for investments made after April 21, 2015, a charity will not be considered to be carrying on a business solely because the charity invests in a limited partnership interest as long as
  • the charity – together with all non-arm’s length entities – holds no more than 20 per cent of all interests in the limited partnership; and
  • the charity deals at arm’s length with each general partner of the limited partnership.
These rules will also apply to registered Canadian amateur athletic associations.

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.