The last federal budget had some big news for the charity sector in the form of a proposed rule change about donating the proceeds of shares and real estate. Unfortunately, this rule change has been severely under-reported on. This is possibly because of a combination of the rather dry technical nature of the change, and the fact that it took a while for the bare-bones announcement in the budget to be fleshed out with any kind of detail.
But although the details may be dry, the end result could be very juicy indeed - making it an issue that all charities should know about. Here are the basics of the changes and what they mean for your charity.
Budget 2015 proudly announced that sales of private shares and real estate could become exempt from capital gains tax if the proceeds are donated to a registered charity or qualified donee. However, if only a portion of the proceeds is donated, the exemption from capital gains tax would apply to that portion. Hence the only way to avoid paying tax on the whole amount is to donate the entire sale amount to charity. This would still be a big change, though, since no such exemptions exist at all at the moment.
Of course, some conditions would apply. In order to benefit from this rule change:
- The donation must take place within 30 days after the disposition of the property;
- The property being disposed of must be Canadian property; and
- The taxpayer must be resident in Canada.
This proposed rule change would apply to dispositions that take place starting January 1, 2017.
The consequences of such a technical scenario are best described with an example.
Say your donor has real estate with an adjusted cost base of $500,000. If she sells this real estate for $2,500,000, she would normally incur a taxable capital gain of $2,000,000.
However, say she donates $1,000,000 of the proceeds to your charity. That donation would represent 40% of the selling price. She would therefore have 40% of the donation ($400,000) be exempt from tax.
This leaves her with a taxable capital gain of $1.6 million instead of $2 million, which translates to about $320,000 in taxes owing. But the charitable donation tax receipt she receives from your charity for the $1 million donation will be worth about $460,000, which more than covers that tax debt. In the end, your donor’s taxable capital gain is effectively in the negative, and your charity has a spare million bucks.
There are some down-sides, however. In this scenario the donor is giving up the capital appreciation earned by her real estate, as well as the principal money she originally used to buy it. In some cases this may be too much for donors to want to deal with – but in other cases, the donor may be able to use the donation tax credit to offset taxes she owes from other sources, enough to make it worth her while.
The way forward
This proposal is a good first crack at what could become a valuable tool for charities that deal with relatively large donors. However, it does have some fairly serious problems and limitations in the form that has been suggested.
For example, corporations do not get charitable tax credits but instead tax deductions, leading to some situations where corporations will get no benefit at all from making a partial donation of proceeds. And as far as individuals go, some provinces like BC and Ontario have high enough tax rates in their highest brackets that they are not totally offset by the charitable donation tax credit, leading to their tax credit in this scenario getting smaller and smaller as the size of their donation increases.
As part of their consultation process, he Department of Finance took comments from industry professionals up until the end of this September. It will be a while yet before the results of these comments and discussions become apparent, and the proposed new provision may go through more than once amendment as the kinks are worked out to everyone’s satisfaction.
Hopefully, though, charities will ultimately be given a compelling new way to make their case to big donors.
Alexandra Tzannidakis is a lawyer with Drache Aptowitzer LLP, a national charity and tax law firm. She helps charities and nonprofits across Canada realize their full potential, and frequently speaks and writes on topics of interest to the sector. She would be happy to hear from you at email@example.com.
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