Friday, May 1, 2015

Good News for Giving Back to the Community

The 2015 Budget contains an important change affecting charitable donations made in 2017 and subsequent taxation years.

For much of the past, the charitable donation system assumed cash donations and actually discouraged Canadians from donating property to charity.  If property had an accrued gain, part of the charitable donation receipt had to be used to avoid tax on the capital gain that resulted from the making of the donation.

Recent changes have made it easier for Canadians to donate property by eliminating the capital gain for specific types of donated property.  For example, assume that I donate $100 worth of shares that are listed on a stock exchange (such as shares of Bell Canada Enterprises).  Even if the shares have a nominal cost, the donation will not result in any capital gains tax.  As a result, I will be able to apply the full $100 donation receipt against my other income.  This makes sense, as I will have actually given $100 away.

The 2015 Budget will extend this enhanced treatment to cash donations that are sourced from sales of real estate and from sales of private corporation shares (shares that are not listed on a stock exchange).  However, these new rules will come into effect only in respect of sales that occur after the end of 2016.

The new rules will not apply if the real estate or the shares are donated to the charity.  Instead, the donor sells the real estate or the shares and donates cash from the sale proceeds within 30 days of the sale.  No capital gain arises on the part of the sale proceeds donated to the charity.  This means that the charitable donation deduction can be applied to reduce capital gains tax on the portion of the sale proceeds that is not donated to the charity.

To use a very simple example, assume that I sell real estate (not my principal residence) for $3 million and would have a capital gain of $3 million on that sale.  If I donate $1 million (one-third of the sale proceeds) to a charity within 30 days of the sale, I pay tax on a capital gain equal to only $2 million (2/3rd of the sale proceeds).  As only 50% of a capital gain is included in income, I have an income inclusion of only $1 million.  Any tax arising on that $1 million income inclusion will be completely offset by the charitable donation of $1 million.  As a result, I give $1 million to the charity and retain $2 million out of the sale price of $3 million.  Without the charitable donation, I would have paid about $690,000 in tax and retained about $2.31 million of the sales proceeds.  So the charitable donation would have cost me only $310,000.

The tax relief applies only to the capital gain.  A sale of rental real estate will often give rise to taxation of depreciation taken in previous years if the building has not actually declined in value.  Tax will still apply in respect of previous depreciation claims that have to be brought back into income on the sale.

As noted, the donation to the charity must occur within 30 days of the sale.  Furthermore, the sale must be to a purchaser who deals at arm’s length with both the donor and the charity.  Anti-avoidance rules will apply to prevent abuse of the new rules.  For example, anti-avoidance rules apply if the donor or another family member re-acquires any of the sold property within five years of the sale.

While I have used the colloquial term “charity”, the new rules will apply in respect of a donation to any “qualified donee”.  Besides registered charities, that term includes registered Canadian amateur athletic associations.

As with any charitable donation, the tax system provides tax relief to assist with the donation.  However, the donor is still making a donation and has to want to give back to the community.  The new rules will make it easier to give back starting in 2017.

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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.