A char­i­ta­ble pro­posal amid the small business tax up­roar

Regina Leader-Post - - FINANCIAL POST - JAMIE GOLOMBEK Tax Ex­pert Jamie.Golombek@cibc.com Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Man­ag­ing Di­rec­tor, Tax & Estate Plan­ning with CIBC Wealth Strate­gies Group in Toronto.

With the whirl­wind of con­tro­versy and re­sul­tant lob­by­ing sur­round­ing the govern­ment’s small business tax pro­pos­als show­ing no signs of abat­ing, a new re­port out this week from the C.D. Howe In­sti­tute says Ottawa has “a sig­nif­i­cant op­por­tu­nity to open a rich vein of wealth for Canada’s char­i­ta­ble sec­tor and si­mul­ta­ne­ously in­crease tax plan­ning op­tions for own­ers of pri­vate com­pany shares and real estate” by amend­ing the tax rules for these types of do­na­tions.

The re­port’s au­thor, Adam Ap­tow­itzer, a tax lawyer spe­cial­iz­ing in is­sues re­lated to char­i­ties at Drache Ap­tow­itzer LLP in Ottawa, is call­ing for pref­er­en­tial tax treat­ment for the do­na­tion of ap­pre­ci­ated pri­vate com­pany shares and ap­pre­ci­ated real estate to char­ity. If this pro­posal sounds fa­mil­iar, that’s be­cause we al­most had it in place for 2017 be­fore it was taken away, prior to it ever com­ing into force.

So, why try again?

“The cur­rent at­tacks (on small business tax­a­tion) set the stage for these pro­pos­als, which al­low for business own­ers with highly ap­pre­ci­ated shares or real estate to make con­tri­bu­tions to char­ity rather than en­dure the high rates of tax­a­tion,” says Ap­tow­itzer.

Canada cur­rently pro­vides var­i­ous tax in­cen­tives to donors. Cor­po­ra­tions can deduct the cost of char­i­ta­ble gifts from their in­come. In­di­vid­u­als who make do­na­tions to reg­is­tered char­i­ties are el­i­gi­ble for a fed­eral non-re­fund­able char­i­ta­ble do­na­tion tax credit of 15 per cent on the first $200 of an­nual char­i­ta­ble do­na­tions. The fed­eral credit rate jumps to 29 per cent for cu­mu­la­tive do­na­tions above $200. High-in­come earn­ers can claim a 33 per cent fed­eral credit. When pro­vin­cial cred­its are added to the fed­eral ones, your to­tal credit can be as high as 50 per cent, de­pend­ing on your prov­ince of res­i­dence.

And, for the fi­nal time in 2017, “first-time donors” can also take ad­van­tage of the tem­po­rary First-Time Donor’s Su­per Credit, which pro­vides an ad­di­tional 25 per cent non­re­fund­able tax credit on up to $1,000 of do­na­tions.

But even more favourable treat­ment has been pre­vi­ously in­tro­duced for gifts of ap­pre­ci­ated se­cu­ri­ties. Since 2006, do­na­tions of pub­licly traded shares, mu­tual funds or seg­re­gated funds to a reg­is­tered char­ity are not only el­i­gi­ble for a tax re­ceipt equal to the fair mar­ket value of the se­cu­ri­ties or funds be­ing do­nated, but you can also avoid pay­ing cap­i­tal gains tax on any ac­crued gain on the shares or funds do­nated. Sim­i­larly, if you’re an em­ployee who has re­ceived stock op­tions, you can avoid pay­ing tax on the stock op­tion ben­e­fit by choos­ing to do­nate the pro­ceeds of op­tion ex­er­cise to char­ity within 30 days of ex­er­cise.

In for­mer Fi­nance Min­is­ter Joe Oliver’s fi­nal Tory bud­get of 2015, a pro­posal was in­tro­duced that would have put do­na­tions of the pro­ceeds from the sale of ap­pre­ci­ated pri­vate cor­po­ra­tion shares or ap­pre­ci­ated real estate on a sim­i­lar foot­ing as do­na­tions of pub­licly traded se­cu­ri­ties. At the time, it was widely praised by the char­i­ta­ble sec­tor as a tremen­dous in­cen­tive that would spur the phi­lan­throp­i­cally-in­clined to con­sider ma­jor gifts of pri­vate com­pany shares and real estate to char­ity. The rule was to come into ef­fect for do­na­tions made as of Jan. 1, 2017.

But be­fore this new rule even came into ef­fect, the new Lib­eral govern­ment, in its first bud­get in April 2016, an­nounced that it was not pro­ceed­ing with draft leg­is­la­tion that would have im­ple­mented these changes. The pro­posed rule was sim­ply can­celled with­out any warn­ing or pub­lic ex­pla­na­tion.

Now, Ap­tow­itzer is hop­ing the govern­ment will re­con­sider. “The ar­gu­ment for mak­ing the change has been that, con­cep­tu­ally, there should be no dif­fer­ence, for pur­poses of tax treat­ment on gift­ing, be­tween the do­na­tion of shares of pub­licly traded se­cu­ri­ties and those that are not,” he states. While the re­port ar­gued for a zero cap­i­tal gains in­clu­sion rate on do­na­tions of ap­pre­ci­ated pri­vate com­pany shares, it doesn’t go so far as ad­vo­cat­ing quite the same treat­ment for do­na­tions of ap­pre­ci­ated real estate. That’s be­cause of the dis­tinc­tion be­tween the tax treat­ment of land deemed en­vi­ron­men­tally sen­si­tive by the min­is­ter of en­vi­ron­ment, which al­ready en­joys a zero in­clu­sion rate when do­nated to a con­ser­va­tion char­ity, and other real estate. “Pre­vi­ous pro­pos­als had the un­in­tended ef­fect of un­der­min­ing the do­na­tion of en­vi­ron­men­tal prop­erty to con­ser­va­tion char­i­ties across Canada,” writes Ap­tow­itzer.

The the­ory is that if the same ben­e­fit — a zero cap­i­tal gains in­clu­sion rate — was ap­plied to all real estate, there would be no longer any in­cen­tive to do­nate en­vi­ron­men­tally sen­si­tive land to a con­ser­va­tion char­ity ver­sus do­nat­ing it to, say, a hos­pi­tal for the con­struc­tion of a new build­ing. In­stead, Ap­tow­itzer rec­om­mends “an in­clu­sion rate higher than zero but less than the cur­rent rate to in­cent do­na­tions of real estate with­out un­der­min­ing the ecogift pro­gram.”

How these pro­pos­als will land with a govern­ment that to date has in­creased tax on the top one per cent of in­come earn­ers, is cur­rently go­ing af­ter per­ceived tax abuse among pri­vate cor­po­ra­tions and has al­ready shot down sim­i­lar pro­pos­als less than two years ago is any­one’s guess.

“It’s not help­ing out the rich peo­ple — it’s help­ing the char­i­ties,” main­tains Ap­tow­itzer.

That may be true, but I’m not con­vinced this govern­ment will see it quite that way.

THE CUR­RENT AT­TACKS (ON SMALL BUSINESS TAX­A­TION) SET THE STAGE

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