Registered charities have always been subject to limitations on what activities they can carry on, as well as a fair amount of compliance in terms of reporting obligations. One area where a charity is subject to limitations is with respect to its ability to carry on a business. Certain registered charities, namely private foundations, are prohibited from carrying on any business, while others, namely public foundations and charitable organizations, are permitted to carry on a business provided it constitutes a “related business” according to Canada Revenue Agency’s policy entitled What is a Related Business. See http://www.cra-arc.gc.ca/chrts-gvng/chrts/plcy/cps/cps-019-eng.html
Historically the concept of carrying on a business meant that investing by a charity in a limited partnership was prohibited. This was so even if the charity was a passive investor, which is typically the situation in the context of a limited partner. This is because Canada Revenue Agency is of the view that a limited partner was carrying on the business of the partnership. As a result, private foundations were prohibited from investing in any limited partnerships, while other registered charities had to ensure the investment fell within the policy on What is a Related Business. This often came as a surprise to many charities who considered the concept of being a limited partner to amount to a passive form of investment.
Recently the 2015 Federal Budget proposed that a registered charity may invest in limited partnerships without being considered to be carrying on a business solely because of that holding, as long as it meets all of the following conditions:
- The charity must be a limited partner of the partnership;
- The charity – together with all non-arm’s length entities – can only hold 20% or less of the fair market value of all interests in the partnership; and
- The charity deals at arm’s length with each general partner of the partnership.
A registered charity with partnership holdings, other than what is described above, would be considered to be carrying on the business of the partnership. Depending on the nature of the partnership’s activities and the arrangement, this could, consistent with the current policy of What is a Related Business, result in the registered charity being offside the rules related to carrying on a business. This, could subject the charity to potential loss of their status.
While the foregoing is welcome news, it comes with some compliance. All registered charities must now annually report their partnership holdings. The T3010 Registered Charity Information Return has not been amended for this year. As a result, a charity must answer certain queries, as per the attached link, and attach the response to their T3010. See http://www.cra-arc.gc.ca/E/pub/tg/15-122/15-122-e.html
For more information, CRA has also provided a Q and A in respect of investments of this nature. See the following link: http://www.cra-arc.gc.ca/gncy/bdgt/2015/qa09-eng.html
Ultimately the softening on the position related to limited partnerships is welcome news for charities, even if it requires some added compliance.