We have written recently about the proposed rules for donating the proceeds from the sale of real estate and private shares (click here to read it). While this provision is the response to much sensible lobbying by some parties in the sector it does not come without side effects. In particular, there should be concern amongst those organizations that seek the donation of real estate rather than cash. These organizations may include those building homes for the homeless, playgrounds for children, or any organizations simply interested in acquiring land.
By way of reminder the new rules allow for the tax free sale of property if the proceeds are donated to charity. The amount of the profit which may be realized tax free is directly proportionate to the percentage of the entire proceeds donated to charity. In other words, if 80 % of the sale price is donated to charity 80% of the taxable capital gain will be tax-free.
On the other hand, when a donor donates land to a charity (not including ecological property to a certified environmental charity – the so called ‘Ecogift program’) the disposition of the real estate is not exempt from tax. For the uninitiated this means that the donor pays capital gains tax on the property as if she sold it but receives an income tax receipt for the full value of the property. Generally, the tax credits generated will be twice the amount of tax owing. The extra credits can be used to offset tax owing from other sources. But where there is no tax owing from the disposition (such as is the case with an Ecogift) all of the credits can be used against tax otherwise owing.
The new provisions encourage the donation of cash proceeds over real estate because, assuming there is a buyer for the property, the donor would pay no tax by selling the property and donating the proceeds as opposed to donating the property. This is clearly a problem for charities that want to make particular use of the real estate for the advancement of their charitable objects. Only a donor without a potential buyer or a sincere commitment to the charity cause would prefer to donate the property rather than the proceeds of the sale.
Even Ecogifts will be affected. With the exception of the carry forward period for the tax credits generated by the donation of ecological property there is no tax difference between an Ecogift and the sale of the same property and the donation of the proceeds. In fact, some donors may be attracted to the sale of the property given that the sale of the property does not require the same level of transactional costs as is necessary to comply with the Ecogift program. Not to mention the flexibility the donor has in only donating a portion of the proceeds rather than the whole property.
The proposals were released July 30th, after Parliament had risen. Obviously Parliament has not resumed sitting since the election. Consequently the proposals are just that, Department of Finance proposals, with no bill having been presented to the House of Commons for a vote. As at the time of writing it is unknown whether the new Liberal government will proceed with them. It is a good bet that they will but now would be the time for concerned organizations to make their feelings known to the Department of Finance and to prepare submissions for the inevitable Finance Committee hearings that will likely resume once Parliament resumes sitting.