Tax Policy and Real Estate Donations

Faces Helped By Charity Water by Chris Sacca
Faces Helped By Charity Water by Chris Sacca

The environment for charitable gifts of capital in Canada has been constantly improving since 1996. Malcolm Burrows from C.D. Howe Institute suggests in the recent report Unlocking More Wealth: How to Improve Federal Tax Policy for Canadian Charities that there is time to make the next step - extending capital gains exemptions to donations of real estate.

There have been over 20 tax incentives of various kinds introduced during the last 13 years in Canada on capital gifts. The overall effect on the charity environment measured in the volume of gifts was positive – charitable giving grew by 140%.

However, several factors force us to think about more improvements to these policies. While the overall volume of gifts rose, the number of donors has been shrinking. Charitable gifts have become one-time large donations, instead of (more desirable) continuous contributions of smaller sums. This trend makes charitable organizations more vulnerable to economic fluctuations.

The implications of these policies also resulted in noticeable market imbalance, as real estate and private company shares are not eligible for capital gains exemption. This leaves both owners and charities with a disadvantage. In reality, real estate is very rarely donated.

Donating real estate involves some challenges. One of the biggest concerns among policy makers is about determining the fair market value of the real estate property donated, which may motivate the donors to alter the value of the property in their accounts. Another concern comes for the charities themselves. Unlike capital gifts, real estate brings higher pressure on charities' administration. Property taxes, maintenance and environmental issues – all these will arise after such a donation.

These concerns shouldn't present unbeatable obstacles. Malcolm Burrows introduces two possible ways of making real estate donations.

  • Donations of cash from a real estate sale. It solves both the problem of valuation (since the property is sold on the market) and the responsibility of charities (since they receive cash). Since the year 2000 it has been possible to sell a certain property and use the earnings for charitable purposes, thanks to the Income Tax Act. This legal base should be enlarged to include real estate properties, enabling the seller to donate the whole sum or just part of it to the charities.
  • Donations of real estate. The main problem lies in the possibility of manipulation of the property value. This can be solved by the use of independent real estate appraisers and by the requirement to hold the donated property for a certain period of time (the report suggests a 10 years period), during which the new owner (the charity) cannot sell it.

Real estate represents a huge share of both individuals' and companies' assets and it is ineffective to discourage the possibility of the charitable donation of such assets. A great deal of work has been done in the field of tax exemptions legislation, but it has left the market imbalanced. The next rational step of addressing this imbalance should be by means of spreading tax exemptions to the segment of real estate donations.

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