By Karen Cooper
A rare potential conservation donation in Georgian Bay, Ontario, with a common potential environmental conservation tax barrier recently produced a successful gift and good news for taxpayers and land conservation organizations. The Georgian Bay Land Trust (GBLT) had an opportunity to protect an undeveloped island featuring undisturbed stands of White Pine and Red Oak, open rock barrens and coastal meadow marsh, ideal habitat for rare species. The property was owned by nine individuals, some Canadian and some American, all descendants of five area property-owners who acquired the island more than 60 years ago. The Canadians controlled 60% of the total ownership and the Americans 40%. Although all of the owners agreed they wanted to protect the island, the challenge was donating it in a way that produced a usable donation tax benefit for both the Canadian and American donors.
The Canadian donors could get significant tax relief by donating their interest in the island to the GBLT through the ecological gifts program (EGP). As long as the property qualified as ecologically sensitive and the fair market value was certified through the EGP, the Canadian owners would be relieved of any capital gains tax on the disposition of their interest in the property and be provided with a donation tax receipt, which could be used to provide a credit against their income tax payable in the year and for the next 10 years.
The American donors could also avoid the capital gains tax on the disposition of taxable Canadian property by gifting to the GBLT through the EGP, but their donation receipt would be of no use to them unless they had Canadian source income. They could also avoid the capital gains tax by electing proceeds of disposition equal to their adjusted cost base under subsection 118.1(6), but once again they would not get any further tax benefit from their donation against their US tax obligations because the gift was made to a Canadian organization. This is a common problem many Canadian conservation organizations have faced in the past when seeking to protect many of the unique and significant natural areas across Canada currently owned by Americans.
Instead, the American owners were able to gift their interest in the island to American Friends of Canadian Land Trusts (“AFoCLT”), an American corporation that is also a US 501(c)(3) charitable organization. AFoCLT was formed by land conservation leaders on both sides of the border to provide the legal mechanism and structure required to make such cross-border land conservation possible. In late 2010, section 3504 of the Income Tax Regulations was amended to add AFoCLT as a “prescribed donee” within the meaning of subparagraph 118.1(5.4)(a)(ii). To qualify as a prescribed donee, the AFoCLT had to provide the Minister of Finance with an undertaking that the property would be held for use in the public interest and was able to satisfy the Minister of the accuracy of that undertaking by incorporating with charitable purposes largely similar to those of Canadian land trusts.
By giving their interest in the island to AFoCLT, the American owners will be able to elect proceeds of disposition equal to their adjusted cost base and avoid tax on the disposition of taxable Canadian property. In addition, since their donation was to a US 501(c)(3) their donation will entitle them to all of the same US tax benefits they would have received had they donated the land in the US.