The Government of Canada has announced that it has designated the American Friends of Canadian Land Trusts (AFCLT) as a “prescribed donee” which will help US donors who wish to donate their Canadian land to this particular US charity to obtain certain tax benefits in the US.
Whitby, Ontario, October 29, 2010
Government of Canada Provides Tax Relief for Charitable Donations to the American Friends of Canadian Land Trusts
•Backgrounder - Tax Relief for Charitable Donations to the American Friends of Canadian Land Trusts
The Honourable Jim Flaherty, Minister of Finance, today highlighted regulatory changes that will help encourage U.S. residents to donate real property in Canada for use in the public interest of Canadians.
The interaction of the Canadian and U.S. tax systems can present an impediment to such donations. Designating the American Friends of Canadian Land Trusts (AFCLT) as a “prescribed donee” ensures that U.S. donors of Canadian real property to the AFCLT can obtain U.S. tax relief for such donations, at no cost to Canada.
“This initiative will encourage donations of lands so that they may be preserved for the enjoyment of current and future generations,” said Minister Flaherty, speaking at an event at Thickson’s Woods, a land trust nature reserve located in south Whitby, Ontario.
The granting of prescribed donee status is typically used to help protect Canada’s natural heritage. The AFCLT intends to achieve this goal by facilitating the acquisition, by Canadian land trusts and conservation organizations, of Canadian lands and interests or rights in Canadian lands that have been donated to it. As such, this designation encourages the preservation of natural areas in Canada that are owned by non-residents.
The regulatory changes were published in the Canada Gazette, Part II on October 13, 2010.
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Backgrounder - Tax Relief for Charitable Donations to the American Friends of Canadian Land Trusts
The Income Tax Act (the Act) generally provides that a taxpayer who disposes of a capital property, including real property, by way of gift is deemed to have received proceeds of disposition equal to the gift’s fair market value (FMV). As a result of these deemed proceeds of disposition, the taxpayer may realize a capital gain for income tax purposes. Usually this is not an issue as the charitable donations tax credit for individuals, and the deduction for corporations, more than offset the tax on any gain arising as a result of the gift. Where this is not the case, the Act allows a taxpayer who disposes of such capital property by way of gift to elect that the proceeds of disposition and value of the gift be reduced to an elected amount as low as the adjusted cost base of the property.
Consequently, both any capital gain and the charitable donations deduction (for corporations) or tax credit (for individuals) may be reduced when such an election is made.
As is the case also for Canadian residents, this election is available to a non-resident who donates property to a Canadian registered charity. However, a U.S. resident may prefer to donate to a U.S. charity for U.S. tax purposes. This is because, if a U.S. resident makes a donation of any kind directly to a Canadian charity, the deduction available to that person under U.S. tax law and the Canada-U.S. Tax Treaty is limited to their Canadian-source income. This creates an impediment for a U.S. resident if the donated property is taxable Canadian property, such as real property in Canada, because the U.S. resident would have to pay capital gains tax in Canada (which would otherwise be offset by the Canadian charitable donations tax credit, if the donation were made to a Canadian charity) in order to obtain tax relief in the U.S.
This dilemma can be resolved if the gift is real property in Canada that is donated to a U.S. charity that is a prescribed donee. In this case, the U.S. resident is permitted to make the election to reduce the capital gain that would otherwise be taxable in Canada, while still retaining the right under U.S. tax law for charitable donations tax relief. The Canadian tax treatment places the U.S. resident in the same position for Canadian tax purposes as if the donation had been made to a Canadian registered charity or other qualified donee in Canada. The election under the Act to reduce the value for Canadian tax purposes applies only if the gift is real property in Canada and the prescribed donee undertakes that the property will be held for use in the public interest.
The American Friends of Canadian Land Trusts intends to satisfy this undertaking by facilitating the acquisition, by Canadian land trusts and conservation organizations, of Canadian lands and interests or rights (for example, easements) in Canadian lands. The American Friends of Canadian Land Trusts is a non-profit corporation that has been approved by the Internal Revenue Service of the U.S. as a charitable organization. Its purposes include the preservation of Canadian lands.
Vol. 144, No. 21 — October 13, 2010
SOR/2010-197 September 23, 2010
INCOME TAX ACT
Regulations Amending the Income Tax Regulations (Charitable Donations)
P.C. 2010-1112 September 23, 2010
Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance, pursuant to section 221 (see footnote a) of the Income Tax Act (see footnote b), hereby makes the annexed Regulations Amending the Income Tax Regulations (Charitable Donations).
REGULATIONS AMENDING THE INCOME TAX REGULATIONS (CHARITABLE DONATIONS)
1. Section 3504 of the Income Tax Regulations is amended by striking out “and” at the end of paragraph (a), by adding “and” at the end of paragraph (b) and by adding the following after paragraph (b):
(c) American Friends of Canadian Land Trusts.
2. Section 1 applies to the 2010 and subsequent taxation years.
REGULATORY IMPACT ANALYSIS STATEMENT
(This statement is not part of the Regulations.)
Issue and objectives
This amendment designates the American Friends of Canadian Land Trusts (AFCLT), a United-States (U.S.) charity created by an affiliation of Canadian charities, as a “prescribed donee.” This amendment allows non-resident donors of Canadian real property to the AFCLT to reduce the related amount of capital gains subject to Canadian tax.
Description and rationale
The AFCLT is a non-profit corporation that was incorporated in the state of Washington and that is administrating a cross-border conservation program. It has been approved by the Internal Revenue Service of the United States as a charitable organization. Its purposes include the preservation of Canadian lands.
The AFCLT intends to achieve this purpose by facilitating the acquisition, by Canadian land trusts and conservation organizations, of Canadian lands and interests or rights (for example easements) in Canadian lands. It has applied for the status of “prescribed donee” for this purpose. If a non-resident makes a donation to a U.S. charity, an election (described below) to reduce the capital gain payable in Canada is unavailable, unless the charity is a “prescribed donee” and the gift is real property situated in Canada.
In particular, the Income Tax Act (the Act) includes a provision under which a taxpayer who disposes of a capital property by way of gift, including real property, is deemed to have received proceeds of disposition equal to the fair market value (FMV) of the property. As a result of these deemed proceeds, the taxpayer may realize a capital gain for income tax purposes. However, the Act provides that a taxpayer may elect to designate a lower amount, generally if the donation is to a Canadian charity, or, if the donor is not resident in Canada, to a “prescribed donee.” This designated amount is deemed to be the proceeds of disposition of the property and the FMV of the gift for Canadian tax purposes. Consequently, both the capital gain and the charitable donations deduction or tax credit will be reduced when a designation is made.
However, there may be circumstances where a person not resident in Canada would prefer to donate a property to a foreign charity. In this regard, if a donation of real property is made, by a person not resident in Canada, to a “prescribed donee,” the election is available to the donor if the gift is real property and the prescribed donee undertakes that the property will be held for use in the public interest. As such, this provision is typically used as an aid in the protection of natural heritage. Prescription of the AFCLT meets this objective.
The Regulations Amending the Income Tax Regulations (Charitable Donations) enact an amendment to section 3504 of the Income Tax Regulations to add a “prescribed donee.”
The Department of Finance has received numerous letters of support from Canadian charities and taxpayers in favour of prescription of the AFCLT.
Implementation, enforcement and service standards
The Act provides the necessary compliance mechanisms. These mechanisms allow the Minister of National Revenue to assess and reassess tax payable, conduct audits and seize relevant records and documents. In particular, the Minister of National Revenue may consider the undertaking by a prescribed donee that a gift of real property will be held for use in the public interest.
Tax Legislation Division
Department of Finance
140 O’Connor Street
S.C. 2007, c. 35, s. 62
R.S., c. 1 (5th Supp.)
The format of the electronic version of this issue of the Canada Gazette was modified in order to be compatible with extensible hypertext markup language (XHTML 1.0 Strict).
The Globe and Mail also covered the issue on October 28, 2010 in an article entitled “Tax changes will favour land trusts” at http://www.theglobeandmail.com/news/politics/tax-changes-will-favour-land-trusts/article1777308/
Do you require legal advice with respect to Canadian or Ontario non-profits or charities?
Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.