Proposed Charitable Donation Rules (#1)

“Government has limited access to donation receipts..”

On Friday December 5, 2003 (“the announcement date”), the Department of Finance proposed further changes with the respect to charitable donation tax shelter arrangements. In the introduction to these proposed changes, Finance discussed the buy-low donate-high tax shelters that they were trying to close down. The rules, however, go much further than that.

What Finance has tried to do is essentially provide a “fair market value grind” to reduce the amount of the donation receipt for transactions they find offensive. They have proposed that if a donor has acquired a property under a “gifting arrangement” the FMV of the property that is the subject of a gift is deemed to be the lesser of (1) the fair market value otherwise determined, and (2) the donor’s cost of the property.

The effect of this provision is to put an end to the “buy-low, donate-high” arrangement because the donation will be based on the donor’s cost and not on the property’s fair market value.

If the property was acquired under a gifting arrangement, it is irrelevant when the property that is the subject of the gift was acquired. However, the government has gone further than that. If the property was not acquired under a gifting arrangement then the proposed rules deem the fair market value to be the donor’s cost:

  1. unless the donor acquired the property three years or more before the gift is made;
  2. if it is reasonable to conclude that, at the time the donor acquired property, the donor expected to make a gift of the property.

This means that even if the three-year test is met, the fair market value will be deemed to be the donor’s cost if it is reasonable to conclude that, at the time the property was acquired, the donor expected to make a gift of property. The burden is on the donor to show that there is no such expectation.

The fair market value grind does not apply to gifts of inventory, publicly traded securities, certified cultural property, ecological gifts, or real property situated in Canada. As well, the three-year test and reasonable expectation of making a gift test do not apply if the gift is made as a consequence of the donor’s death.

The one type of asset not mentioned above is the donation of private company shares. Therefore, if a shareholder did an estate freeze and took back preferred shares and donated those preferred shares within the three years, then the donation would have to be at cost and not fair market value. Even if the three-year test is met, the taxpayer could fail the reasonable expectation of making a gift test since the freeze may have been done with the intention of giving the shares to a charity.

The other rules, with regard to advantages received by the donor, will be dealt with in a subsequent tax tip.

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