Donald K. Johnson is a volunteer board member of four not-for-profit organizations in each area of the charitable sector, and a member of the advisory board for BMO Capital Markets.
The 2015 federal budget has provided a great opportunity for charities to unlock more private wealth for public good. Now is the time for all charities and prospective donors to start planning to capitalize on this opportunity.
Effective Jan. 1, 2017, donors who sell private company shares or real estate to an arm's-length party and donate the cash proceeds or a portion of the proceeds to a registered charity within 30 days of the sale, will be exempt from capital-gains tax on the portion donated.
Charities now have enough time to identify prospective donors and educate them on the tax benefits of the measures. Prospective donors also have enough time to consult with their tax and legal advisers to plan their charitable giving on a very tax-effective basis. Importantly, because this legislation is not yet passed and this is an election year, this measure has the support of both opposition parties.
The removal of the capital-gains tax on gifts of listed securities in the 2006 budget has resulted in charitable donations of more than $1-billion virtually every year since. The 2015 budget measure should stimulate an additional $200-million a year in charitable donations.
In the United States, approximately 20 per cent of gifts of appreciated capital property are in the form of private company shares and real estate, with 80 per cent in listed securities.
Charities should begin the process of identifying prospective donors who, first of all, have a reason to be interested in making a donation to their charity, and secondly, have significant assets in the form of private company shares and/or real estate.
Charities will need to meet with them to outline the tax benefits of the measure. One of the most prominent benefits: If the owner of a private company decides to retire and sell his or her business, he or she could arrange for the sale of the company to an arm's-length party and donate all or a portion of the sale proceeds to a charity or group of charities. For example, they could donate 15 per cent or 20 per cent and use the charitable-donation tax credit to reduce or eliminate the capital-gains tax on the remaining 85 per cent or 80 per cent of the shares they are selling for their own benefit. Minority shareholders in private companies typically have a purchase and sale agreement between themselves and the controlling shareholder. They can sell their shares at any time, provided the controlling shareholder is an arm's length party, and donate the cash proceeds to a charity.
Many charities have asked what additional tax incentives can the government introduce to encourage more charitable giving. The main issue that the Department of Finance needs to address is a potential impediment to charitable donations of commercial real estate. When the owner of commercial real estate sells the property, all of the capital cost allowance (CCA) that has been deducted from the owner's taxable income is fully recaptured and added to the owner's taxable income. If the building is fully depreciated, the recapture of the CCA could exceed the tax savings associated with the capital-gains tax exemption. This impediment could discourage donations of commercial real estate.
We have suggested two alternatives to address this issue and mitigate the fiscal cost. The donor could be permitted to transfer the CCA recapture to another property that he or she owns or acquires, so that the tax associated with the recapture would simply be delayed until that property was sold, or, the recapture could be phased in over a period of five or 10 years.
Our charities and prospective donors should start planning now to capitalize on the enormous opportunity that begins in 2017. There's no time like the present.