Wealth Strategies: Donation Rules - Advantageous Update

Donation Rules - Advantageous Update

As one acquires assets throughout their lifetime, charitable donations can certainly become an important a part of an overall tax strategy, while providing the added benefit of contributing to a worthy cause.   The pot may even have been sweetened of late, with draft legislation in late 2015 for donating private company shares and real estate within Canada.  Prior to this, in order to realize significant tax savings (whereby capital gains are not taxable to the individual) and to receive a donation credit, the only option for contributing to a qualified charity was to donate public company shares.  Adding private shares and real estate to the list therefore opens up a whole new window of opportunity.  Manulife’s Assistant Vice-President Florence Marino wrote:

“To qualify for the exemption, the private company shares or real estate must be sold and cash proceeds gifted to a qualifying charity within 30 days. The sale must be to an arm’s length, non-affiliated person or partnership, and the taxpayer must be a resident of Canada at the end of the year of disposition. The draft says the new rules would take effect in 2017. The donor will get a charitable gift receipt for the cash proceeds to the charity, as well as a tax exemption for some or all of the capital gain triggered by the sale of the shares or real estate. If the gift is made by a corporation, a capital dividend account (CDA) credit for the non-taxable portion of the capital gain would also result. So, it is possible that:

• The entire capital gain is sheltered from tax:
• The donation could be used to shelter other income: and
• In the case of a corporate donation, the credit to the CDA could be distributed as a tax-free capital dividend to shareholders of the corporation.

This possibility is equivalent to what happens with gifts of publicly-traded securities.”

These new rules are also applicable to gifts made by the graduated rate estate (GRE) of a deceased taxpayer.  For example, private company shares are deemed disposed of at death for the taxpayer.  Florence noted:  “The resulting capital gain can potentially be eliminated if shares are sold for cash to an arm’s length party by the GRE and the cash is donated to charity within 30 days of the sale”.

Another potential application of this new draft legislation concerns insurance, whereby a sale of private shares can be made by an estate funded by life insurance proceeds in arm’s length buy-sell agreements. This option is subject to rather specific and detailed criteria, and therefore advance planning would be necessary.

In the above, as with most tax strategies, there are specific rules and conditions that must be met in order to qualify. Professional tax advice should therefore be sought in advance of any of the above-mentioned scenarios.