Finance Canada has released the fine print that will both introduce and limit a new tax break, when arm’s length sales of real property situated in Canada or the shares of a private small business corporation are donated to charity by a resident taxpayer, effective the 2017 tax year.
The provision was first announced in the April 21, 2015, budget; but, as the preamble to the section indicates, the government may already be having misgivings on the implementation of the provisions. The legal detail was released, amongst other changes, on July 31, 2015, and consultations on the matters are being sought.
The transaction will qualify for arm’s length transactions only (that is, when the property is not sold to family or affiliated businesses), and when cash proceeds are donated to a registered charity within 30 days. The disposition must be to a person or a partnership, not another corporation or a trust. It also cannot involve a series of transactions to circumvent arm’s length or non-affiliation requirements under the Income Tax Act, which are described in detail in order to ensure anti-avoidance rules are followed.
Where the donation results from a deemed disposition on the death of a taxpayer (as per Section 70 of the Income Tax Act), the deceased must have been a resident of Canada immediately before death and the graduated-rate estate must make the cash donation to a qualified charity within 30 days, and report the disposition and the donation according to recently introduced new rules.
The formula for calculating the qualifying tax exemption and eligible donation is also limited by “Variable C,” which is the amount of the advantage, if any, as defined in subsection 248(32), which includes the total value of any property, services, compensation, use or other benefits to which the donor of the property is entitled.
In addition, any donation of flow-through shares will require adjustment for any charitable contribution under the new provisions.