Tax and Accounting Changes Coming to Canada in 2023

There are proposed key changes coming to the healthcare philanthropy sector in Canada from the Accounting Standards Board and the 2023 Federal Budget this year. I've highlighted the impact of what these proposed changes could mean for the sector below.

Accounting Standard Board Proposed Changes:

In March 2023, the Accounting Standards Board (AcSB) issued an Exposure Draft proposing several changes to the Accounting Standards for Not-for-Profit Organizations (ASNPO). The AcSB developed a proposal that is meant to replace the current guidance with a single approach for recognizing revenue from restricted contributions, providing specific guidance on special types of contributions, including endowments, capital asset contributions, and contributed materials and services. This includes amendments to the current guidance on financial statement presentation by nonprofit organizations (NPOs).

Of all the proposed changes, the standard which will likely have the greatest impact on any fundraising organization is the proposed change to the method of revenue recognition. This new proposed standard requires a singular approach to accounting for revenue to be taken by all organizations. Under the terms of the Exposure Draft, NPOs will be required to defer the recognition of revenue for restricted contributions until the external restriction(s) associated with the contribution are met. This is a substantive change even for those organizations currently using the restricted fund method and will apply to all NPOs, including healthcare foundations, irrespective of their size.

To explain this change further, under the current restricted fund method which most healthcare foundations follow, revenue is recorded in the Statement of Operations and Changes in Net Assets in the year in which the revenue is received. Under the new deferral method, the revenue will be recognized when (or as) the external restriction(s) associated with the contribution is (are) met. For example, under the restricted fund method, if an organization receives $10M in donations for that fiscal year, the entire $10M plus any investment income will be recorded as total revenue for that year in the Statement of Operations. Under the deferral method, only that portion of the donations revenue that matches the contribution made pertaining to the campaign, project, or equipment will be recorded in the Statement of Operations for that year—say $2M—with the balance being recorded as Deferred Revenue under Liabilities in the Statement of Financial Position (Balance Sheet). The remaining $8M will be recognized and brought into revenue as and when the matching contributions flow over the years.

In simple terms, for any organization undertaking fundraising campaigns where the projects take several years to come to fruition, revenue will ebb and flow over the years. Expenses will continue to be incurred, particularly in the early years of a campaign where feasibility studies are undertaken, campaign plans developed, and new campaign leadership and staff recruited. Under this proposed accounting treatment change, the reflected revenue will be lower than the previous, and the fundraising cost ratio off the charts. 

From a donor stewardship perspective, this could mean donors, especially major donors, may shy away from donating upfront and prefer contributing to a project when it is closer to fruition. In addition to the burden of additional tracking and additional finance staff, it also raises the question of stewardship and the ability to meaningfully and clearly communicate impact and financial outcomes to donors. 

The AcSB is currently inviting comments and feedback on these issues till September 30th. If this standard is approved, it would be applicable for fiscal years starting on or after January 1, 2026. Please discuss this with your board, finance committee, and finance teams and provide feedback here before September 30th.

Federal Budget 2023 Changes

Alternate Minimum Tax–Capital Gains Rate Change

Federal budget 2023 has proposed changes to the federal Alternative Minimum Tax (AMT) that target high-income individuals and are expected to come into effect January 2024. Of these changes, the one that will impact charities the most is the inclusion of 30% of the capital gains on donations of publicly listed securities. 

Many of the transformational gifts from donors, often in the multi-million dollar range and triggered by a large financial event, enable charities to make a real impact on the health and well-being of Canadians, but this level of giving is directly correlated to the tax savings higher income Canadians receive through their donations. This proposed change to the AMT could potentially undo many of the benefits realized when the tax on capital gains through gifts of securities was removed two decades ago.

New Trust Reporting Rules

Under the current rules, trusts are required to file an annual income tax and information return (T3 return) with some exceptions. The new reporting rules for trusts with year ends of December 31, 2023, apply to “express trusts” held by charities. What this does is place an extraordinary administrative burden on charities that hold multiple funds such as endowments at universities and hospitals, as each fund would require reporting. 

This article in Globe and Mail explains this further.

All of the above changes pose further challenges to our sector at a time when donor acquisition and retention are difficult in the current economic situation. 

*The facts in this article are applicable to the rules as they stand in August 2023 and could change in the future.