Legislation on Tax and Property Donations

Since 1996 the giving of charitable contributions of capital has been advancing in Canada. Malcolm Burrows from C D Howe Institute conveys in the recent article Unlocking More Wealth: How to Improve Federal Tax Policy for Canadian Charities that there is time to make the next step; augmenting capital gains exemptions to donations of real estate.

There have been over 20 tax initiatives of assorted kinds brought in during the last 13 years in Canada on capital gifts. Donating to charity surpassed 140% due to these tax initiatives.

However, a few factors force us to think about more advancement to these policies. While the overall number of gifts rose, the number of donors has been shrinking. Charitable awards have become one-time generous donations, instead of (more desirable) continuous contributions of smaller sums. This trend makes charitable associations more vulnerable to economic fluctuations.

The significance of these policies also resulted in conspicuous market imbalance, as real estate and private company shares are not accepted for capital gains exemption. This leaves both owners and charities with a disadvantage. In actual fact, real estate is very rarely donated.

Real estate bequeathing produces its own set of issues. Working out a realistic market cost of the property gifted is a problem that faces policy makers, especially when some donors may not give realistic values. Problems can arise for the charity to whom the donation has been given too. Unlike capital bequeaths, real estate brings larger pressure on charities’ administration. After bequeathing the property is accountable to taxes and upkeep which present their own set of difficulties for a charity.

Even though there are problems, there are alternatives possible. Malcolm Burrows illustrates ideas to make gifts of real estate.

One of these is by selling the real estate at the outset, then gifting the cash. Receiving cash from the property sale avoids any problems with valuations, tax and upkeep. Since the year 2000 it has been possible to sell a certain property and use the revenue for charitable reasons, thanks to the Income Tax Act. This legal base should be increased to include real estate properties, sanctioning the seller to gift the whole sum or just part of it to the charities.

If someone wants to make a donation of real estate. The main problem lies in the probability of complicity of the property value. This can be resolved by the use of independent real estate appraisers and by the necessity to hold the donated property for a satisfactory period of time (the report suggests a 10 years period), during which the new owner (the charity) cannot sell it.

It would be at great handicap to charities if these type of bequeaths were discouraged as real estate is a large portion of companies’ and individuals’ assets. Tax exemption legislation has had a lot of work done on it over the last few years but there is still a way to go to stabilize the market. The next rational step of addressing this imbalance should be by means of spreading tax exemptions to the portion of real estate donations.