Proposed Charitable Donation Rules (#2)

“Advantages Received by the Donor.”

Further to the recent Tax Tip (04-01), this tax tip on the proposal rules on donations will discuss what happens to advantages received by the donor. If there is no fair market value grind because of the rules dealing with holding the shares for less than three years or the reasonable expectation of making a gift test, there still may be a reduction to the fair market value of the donation if an “advantage” is received by the donor. The “amount of the advantage” of the gift is defined in the proposed rules. The amount of the advantage in respect of a gift is:

  1. the value, at the time the gift is made, of any property, service, compensation or other benefit which the donor or other non-arm’s length person has received, obtained or enjoyed, or is entitled, either immediately or in the future and either absolutely or contingently, to receive, obtain or enjoy;
  2. that is consideration for the gift;
  3. that is in gratitude for the gift;
  4. that is in any other way related to the gift; and
  5. the limited recourse debt in respect of the gift.

This rule applies regardless of whether the property was acquired under a gifting arrangement. There are three general criteria in order for there to be an advantage in respect of making a gift. The first criteria is that there must be a property or service that the donor or non-arm’s length persons have received or are entitled to receive. The second criteria is that the property or service must be received or entitled to be received as consideration or in gratitude for the gift, or be in “any other way related to the gift”. The third criteria is that there must be limited recourse debt.

Limited recourse debt is defined to be the unpaid principle amount of any indebtedness for which recourse is limited, either immediately or in the future and either absolutely or contingently. This debt usually refers to a secured loan where the only recourse to the lender is in repossessing the property that is collateral for the loan.

If a car was donated with a loan on it, then the donation receipt would be reduced by any loan on that car.

On top of all of these rules, there is an anti-avoidance rule which states that if there is a series of transactions that are meant to increase the cost to a donor of the property, then the fair market value will be deemed to be the lowest cost of the taxpayer to acquire that property or an identical property at any time.

In general, the Department of Finance has taken a sledgehammer in order to kill an ant. If the Department of Finance would have stated that any asset has to be held for one year, then it would have likely limited the tax shelters that they are trying to fight. Instead, they have effected many more transactions than they were trying to catch.

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

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Cadesky Tax