Changes Planned to Make Donating More Tax Friendly

With a proposed tax change in the recent federal budget, it may be possible for charities to see an increase in donations. The Federal government’s new budget provides for an exemption to paying capital gains tax for taxpayers donating the cash proceeds from the sale of private company shares, real estate investments or secondary homes. This new tax credit is similar to the non-refundable tax credit that has been applicable to publicly transferred shares, mutual funds or segregated funds since 2006. The difference between the new tax credit and the existing exemption is that for the new tax credit, the credit is applied if the donor sells the securities or real estate and donates the cash proceeds. For the 2006 tax credit, the securities have to be transferred directly to the charity. This new rule is slated to take effect for sales of shares or real estate starting in 2017.

 

There are some catches to the tax credit. The charity must be qualified, meaning that the charity must be a registered charity or a registered Canadian amateur athletic association. Other entities are also expected to qualify when the legislation is passed. To qualify for the capital gains exemption, the proceeds must be donated to a qualifying organization within 30 days of the sale. To be eligible, the donor and the recipient charity must be arm’s length from each other. The seller and purchaser must be at arm’s length as well. For example, the owner of an investment property could not sell it to their spouse or other family member and donate the proceeds to a charity on which they served on the board. There are other anti-avoidance rules included in the budget. Most notably, the capital gains exemption will be denied if the donor reacquires the shares or real estate that was sold within 5 years of disposition. If only a portion of the disposition is donated, the exemption states that the capital gains exemption will be applied proportionally.

 

At this time, the new tax credit has not yet been finalized and until draft legislation is released, there may be some changes regarding requirements for the new tax credit.