By: Adam Aptowitzer
For several years now there have been voices in the charity community advocating for change to the regime by which private company shares and non-environmentally sensitive land may be donated to charity. The arguments for making the changes were good. The first argument for making the change was that conceptually there should be no difference between the donation of shares of publicly traded securities and privately held ones. This conceptual argument broke down somewhat in the discussion of real estate where there is a clear public benefit in keeping sensitive lands in the hands of environmental charities. Nevertheless, the fact that there are billions of dollars tied up in the hands of baby boomers which will soon undergo an intergenerational shift is a truism of both private company shares and real estate of all types and all areas of the country.
Prior to Budget 2015 there was no special treatment for the donation of regular (i.e. non environmental) real estate. There are however, provisions applicable to the donation of private company shares to charity. For the most part this regime is very complicated as there are many anti – avoidance rules to ensure that the donation of shares of a private company results in a proper valuation and that the donor does not retain control of the corporation even after the donation.
Budget 2015 provides what could be a huge boost to charities by allowing for some level of tax exemption on the tax that would be owing if the shares or real estate are sold and some or all of the proceeds are donated to charity. We say ‘could’ because while typically the exact wording of the amendments to the law would be included in the budget this year the document simply contains a declaration that:
The Act is modified to give effect to the proposals relating to Donations Involving Private Corporation Shares or Real Estate described in the budget documents tabled by the Minister of Finance in the House of Commons on Budget Day.
So we cannot know for certain the exact nature of the proposals. Most importantly the extent of the exemption is unclear. In the years prior to the complete abolition of capital gains tax on the donation of publicly traded securities such shares were entitled to a partial tax break on their donation. (This was in part Paul Martin’s testing of the popularity of the measure before fully committing to it). It is entirely possible that the government will pursue a similar system involving only a partial tax break on the proceeds of relevant sales donated to charity.
Lending credence to our suspicion that the exemption is only partial are the estimates of the rather paltry amounts these combined measures will cost the government. Of the billions of dollars the government earns on the taxation of capital gains from the sale of shares and real estate in a year across the country it imagines the new measure will only cost the government $5 million in 2016 – 2017 up to $95 million in 2018 – 2019. Then again this could be a reflection of the government’s estimate of our charitable nature, or the inherent inability to guess how a new incentive could alter behaviour.
We tend to believe that this new regime will be very popular with baby boomers selling their business for more than they need to live out their years. And while there are innumerable business owners and real estate holders for whom these provisions could apply the devil may well be in the details. The current proposals make it clear (appropriately) that the sales in question must be to arm’s length buyers. This was intended to solve the valuation issue which would arise if the assets were donated to the charity directly or transactions took place between related parties. But often businesses are sold for full fair market value to one’s children or siblings as an exit strategy for one or more of the owners and the new incentives will not apply to such sales.
Moreover, there is a tension between buyers and sellers regarding what actually is sold. For more than one reason buyers want to buy assets while sellers look to sell the shares of a business. The new incentives will not apply to asset sales (unless of course the underlying asset is real estate). Another concern is the application of the lifetime capital gains exemption. Each Canadian is entitled to sell up to $800,000 (now increased to $ 1 million for owners of farm and fishing corporations) of shares in certain types of corporations and pay no tax on the capital gain. In situations where an individual sells shares of up to this amount (multiplied in cases where the corporation has more than one shareholder) there would be no incentive to donate anything to charity because the amount is already not taxable. There is similarly no tax incentive to donate ones principal residence to charity.
Added to this are the anti-avoidance provisions (perhaps with more to come) which state that the exemption is not available in circumstances where, within five years after the disposition:
- the donor (or a person not dealing at arm’s length with the donor) directly or indirectly reacquires any property that had been sold;
- in the case of shares, the donor (or a person not dealing at arm’s length with the donor) acquires shares substituted for the shares that had been sold; or
- in the case of shares, the shares of a corporation that had been sold are redeemed and the donor does not deal at arm’s length with the corporation at the time of the redemption.
Where the anti-avoidance rules apply, the exemption will be reversed by including the previously exempted amount in the income of the donor in the year of the re-acquisition by the donor (or the non-arm’s length person) or the redemption.
Ultimately, one would imagine that these new proposals could (there’s that word again) be very powerful but there are simply too few details to really know. We expect that Parliament will soon rise for the summer recess, the Governor General will prorogue Parliament during the summer and an election will be fought before Parliament is recalled. Under those circumstances these proposals will die and may, or may not be resurrected by the government after the election. So after all maybe there is no point in having details on something that may never come to pass.