Earlier this week, the federal government released its 2015 budget. The budget contains a number of proposals to amend the Income Tax Act, and also provides updates regarding previously announced tax measures. One of the proposed changes announced in the budget will be especially relevant to donors and registered charities.
Currently, when capital property is donated to a registered charity, the donor is generally entitled to a donation tax credit (if the donor is an individual) or deduction (if the donor is a corporation). However, unless the donor is eligible for an exemption, the donor also realizes a capital gain on the disposition of the property, which is subject to tax. The Income Tax Act includes exemptions from capital gains tax where the capital property donated is a gift of ecologically sensitive land, certified cultural property or publicly listed securities, but there is no capital gains exemption for gifts of real estate or private company shares.
The budget proposes to extend the exemption from capital gains tax where the proceeds from the sale of private company shares or real estate are donated to charity. This exemption will apply where: (1) private company shares or real estate are sold to a purchaser that is dealing at arm’s length with the donor and registered charity; and (2) cash proceeds from the sale of the shares or real estate are donated to a registered charity within 30 days of the sale. If only a portion of the sale proceeds are donated to charity, only that portion of the capital gain will be exempt from tax. This change will apply to dispositions that occur after 2016.
Although the scope of the exemption will become more clear once draft legislation is released, at this point it does not appear that the exemption will apply where private company shares or real estate are donated directly to a charity. As a result, the property will need to be sold to a third party in order to benefit from the exemption.
The budget also proposes new anti-avoidance rules that can apply if certain related party transactions occur within five years of the disposition of the private company shares or real estate.
According to a recent article in the Globe and Mail, the charitable sector expects to get a major boost in donations as a result of these changes.