Implementation of Budget 2015 – An Update

Authored by Nevena Urosevic, Associate Director of Legal Affairs

Noteworthy’s blog post titled Charity Highlights of Budget 2015 outlined and explained the three proposed changes to charity law found in Budget 2015. They are:

1. Capital gains tax exemptions for donations of proceeds from the sale of private shares and real estate
2. Allowing charities to invest in limited partnerships
3. Expanding the concept of “qualified donees” to foreign charitable foundations

This blog post serves as an update to the three proposed changes.

Capital Gains Tax Exemptions for Private Shares and Real Estate

On July 31, 2015, the Department of Finance released for consultation draft legislative proposals for the implementation of the capital gains tax exemption. The new capital gains exemption would be found at paragraph 38(a.4) of the Income Tax Act (“ITA”) and would render a taxpayer’s taxable capital gain from the disposition of property zero if:

• The property is a private corporation share or real or immovable property situated in Canada (“qualifying property”);
• Some or all of the sale proceeds of the qualifying property are gifted to a qualified donee within 30 days of the disposition;[1]
• The disposition occurs after 2016; and
• The taxpayer is resident in Canada at the end of the taxation year of the disposition.

The anti-avoidance measures, which would be found at paragraph 38.4 of the ITA indicate that where:

• The purchaser is not dealing at arm’s length with, or is affiliated with, the taxpayer or the qualified donee to which a gift is made in connection with the disposition;
• The disposition is a transaction or part of a series of transactions or events that include one or more agreements or other arrangements that can reasonably be considered to have been entered into with the purpose of avoiding the application of the non-arm’s length/non-affiliation requirement;
• The property is a share and that share is redeemed, acquired, or cancelled in the taxation year;
• Subsection 118.1(16) of the ITA dealing with loanbacks applies; or
• The property that was sold is either
  • reacquired by the donor, or
  • acquired by either the qualified donee, or a person or partnership affiliated or not dealing at arm’s length with either the donor or the donee

within 60 months of the disposition,

the exemption will not apply. Where the exemption was already applied, it would be reversed so that the capital gains once again become taxable. Interest may also apply.

Investments in Limited Partnerships

The draft legislation has remained unchanged with respect to investments in limited partnerships.

Qualified Donees now include Foreign Charitable Foundations

Whereas previously only foreign charitable organizations could be qualified donees, now foreign charitable foundations can also be qualified donees. The same conditions granting foreign charities qualified donee status apply to all charities, regardless of whether they are organizations or foundations. This was passed into law and is now found in the Income Tax Act at subsection 149.1(26).

Conclusion

It is important to note that while the third proposed change, pertaining to foreign charitable foundations, has been passed into law, the other two[2] have not yet passed into law; nonetheless, they are already being administered by CRA as if they have passed into law. Therefore, Canadians  can begin taking advantage of the capital gains exemption for private shares and real estate for all dispositions occurring after 2015, and were able to invest in limited partnerships since April 21, 2015.

[1] It is important to highlight that it is not the donation of private shares or real estate as a gift-in-kind that would benefit from the capital gains exemption, but rather the proceeds from the sale of private shares or real estate.

[2] Capital gains exemptions for proceeds of private shares and real estate; and investments in limited partnerships.