Canada should kill the capital gains tax on donations of appreciated real estate and private company shares to charity, says a study released this week by the C.D. Howe Institute.
In the report entitled Unlocking More Wealth: How to Improve Federal Tax Policy for Canadian Charities, author Malcolm Burrows outlines the need for the policy change and the benefits that would result.
Since 1996, the federal government has introduced more than 20 tax incentives to encourage and regulate charitable gifts. Perhaps the biggest change was the government's 1997 decision to halve the capital gains inclusion rate on the donation of publicly listed securities, mutual funds and segregated funds to a registered charity.
Nine years later, the 2006 budget completely exempted the gains on such a donation from tax.
Mr. Burrows suggests the next step on the government's charity agenda should be to introduce a similar rule for the donation of real estate and private company shares, "potentially broadening the donation base and making charities less vulnerable to market swings. These credits could be introduced in a manner consistent with existing laws, to reduce the chance of tax system abuse."
One of the oft-cited impediments to the donation of both real estate and private company shares is concern about appropriate valuations. The report addresses this issue in various ways, depending on what is being donated and its intended use by the charity. For example, Mr. Burrows recommends that if the proceeds received on the sale of real estate are donated within 30 days of the real estate sale, not only would the owner be entitled to a tax receipt equal to the fair market value proceeds, but the capital gains tax would be waived.
This proposal solves several concerns at once. Most importantly, the valuation of the real estate by the charity is no longer an issue. In addition, the charity doesn't have to enter the property management business or worry about an existing mortgage or selling the donated property.
From the donor's perspective, he or she could choose to donate only a portion of the real estate proceeds, receive a partial receipt and partial capital gains exemption and use the remaining proceeds to pay off any outstanding mortgage on the property.
What if the charity wants to hold the real estate for use in its own charitable activities? Mr. Burrows proposes that in that case, the recipient charity would have to agree to hold it for at least 10 years and a qualified third-party appraiser would need to value the property being donated for the purpose of the donation receipt.
For gifts of private company shares, the report recommends that due to valuation and liquidity concerns, a receipt should be issued only if the shares were sold by the charity within five years. Upon sale, the purchase price would be validated by an independent appraisal.