Canadians will be able to make charitable donations involving private corporation shares or real estate without getting hit with a capital gains tax bill, under a measure proposed in the 2015 federal budget.
The budget proposes a capital gains exemption on private shares or real estate, in cases in which they are sold and the proceeds are donated to charity.
“We will create a capital gains tax exemption for public-spirited Canadians who wish to donate private shares or real estate when the proceeds of their sale are directed to a charity,” said Finance Minister Joe Oliver, in his budget speech on Tuesday.
Under the current tax rules, donations of publicly listed securities to registered charities and other qualified recipients are exempt from capital gains tax. However, donations of private shares and most types of real estate can give rise to taxable capital gains.
In an effort to help Canadians provide more gifts, the government proposes in the budget to exempt individual and corporate donors from tax on the sale of private shares or real estate to an arm’s length party if the proceeds are donated to a qualified recipient within 30 days.
If a portion of the proceeds is donated, the exemption from capital gains tax would apply to that portion. The measure will apply to dispositions occurring after 2016.
The measure is being implemented in response to the 2013 report of the House of Commons Standing Committee on Finance on charitable donation tax incentives, according to the budget document.
The initiative could foster more charitable giving, especially among business owners who decide to sell their business, according to Debbie Pearl-Weinberg, executive director, tax and estate planning, wealth advisory services at CIBC.
“I think it’s a welcome initiative from the perspective of reducing the after-tax cost of a donation in a situation where somebody has sold a business to a third-party buyer,” she says. “It’s an added incentive for them to make a donation.”
The government estimates that this measure will reduce federal revenues by about $265 million over the 2016–17 to 2019–20 period.
The exemption will not be available in certain circumstances, under a number of anti-avoidance rules included in the budget. Specifically, the exemption will not be available if, within five years after the disposition, the donor (or a person not dealing at arm’s length with the donor) re-acquires any property that had been sold or acquires shares substituted for the shares that had been sold, or if 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.
In these situations, the exemption will be reversed, with the previously exempted amount included 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.