This week’s federal budget contained a proposed measure that, once enacted, will be of tremendous value to the charitable sector and should lead to a surge in major gifts come 2017, when the new rule is to take effect.
The proposed measure would eliminate the capital gains tax on the sale of appreciated private company shares and real estate if the proceeds are donated to charity within 30 days.
Individuals who make donations to registered charities are eligible for a federal non-refundable charitable donation tax credit of 15 per cent on the first $200 of annual charitable donations. The federal credit rate jumps to 29 per cent for cumulative donations above $200. When provincial credits are added to the federal ones, your total credit can be as high as 50 per cent, depending on your province of residence.
“First-time donors” can also take advantage of the temporary First-Time Donor’s Super Credit, which provides an additional 25 per cent non-refundable tax credit on up to $1,000 of donations.
Since 2006, donations of publicly traded shares, mutual funds or segregated funds to a registered charity not only get you a tax receipt equal to the fair market value of the securities or funds being donated, but you can also avoid paying capital gains tax on any accrued gain on the shares or funds donated. Similarly, if you’re an employee who has received stock options, you can avoid paying tax on the stock option benefit by choosing to donate the proceeds of option exercise to charity within 30 days of exercise.
By comparison, under current rules, donations of appreciated private corporation shares or appreciated real estate are not subject to any capital gains tax relief. The 2015 budget proposes to change this and to exempt capital gains arising from the sale of private corporation shares and real estate from taxation if the cash proceeds from the sale are donated to a qualified charity within 30 days.
To qualify, the sale must be to a purchaser that is dealing at “arm’s length” with both the donor and the charity to which the cash proceeds are donated, preventing you from “selling” your shares to your brother and then avoiding the capital gains tax by donating the proceeds to charity.
To prevent mischief and games people may be tempted to play, the budget contains an anti-avoidance rule that will deny the capital gains exemption in circumstances where, within five years after the sale, the donor (or someone not dealing at arm’s length with the donor) reacquires the shares or real estate that was sold.
If the anti-avoidance rule applies, the exemption previously granted will be reversed by including the previously exempted amount in the donor’s income in the year the donor re-acquires the property.
Finally, note that you don’t have to donate 100 per cent of the sale proceeds of your private company shares or real estate to charity to benefit from the new capital gain exemption. If you donate less than 100 per cent, your exemption would simply be pro-rated by the ratio that the cash proceeds donated is of the total proceeds from the disposition of the shares or real estate.