A Charitable Gift: Differing Tax Outcomes Can Affect the Plan
Charitable gift planning should involve the careful consideration of all aspects of making a large gift to charity. Some of the elements to be considered include the exact nature of the gift (i.e., cash versus a specific asset), the timing of the gift (i.e., all at once or in installments), whether the gift is inter vivos or testamentary, the income tax consequences of making the gift (i.e., realization of accrued capital gain or income), and the income tax benefits that could arise as a result of the gift (i.e. tax credits for individuals or deductions for corporations). The donor’s expectations can have a significant influence on whether a charitable gift is completed.
Examples of the tax consequences that could arise upon making an in-kind charitable gift include:
- Realization of the accrued capital gain but a zero income tax inclusion rate. This would be applicable for gifts of publicly-traded securities and certain other capital properties
- Realization of the accrued capital gain with a “normal” 50 percent inclusion rate into taxable income. This would be applicable for gifts of most other capital property.
- Realization of the accrued gain with a 100 percent taxable income inclusion rate. This would be applicable to gifts of inventory or life insurance policies.
The distinction between a gift of capital property and a gift of inventory can be contentious because of the significant difference in income tax consequences. This issue arose in a recent case, Mario Staltari v. The Queen, before the Tax Court of Canada. The facts of the case are as follows:
- Mario Staltari donated a piece of land to the City of Ottawa in 2009 and claimed the realized gain on account of capital on his personal tax return.
- Throughout his career, Mario was a real estate broker and had accumulated significant wealth in the form of rental properties and investments.
- Mario bought the piece of rural farm land in question from his father in 2000 for $70,000 at the request of his father who was retired and wanted the cash flow to help meet his retirement needs. The father had purchased the land years earlier with no intention of developing the property.
- From 2003 to 2005, Mario actively investigated the possibility of developing the land, spending about $293,000 on such investigations. However, at some point in the process, the Ministry of Natural Resources became involved because they thought the land could be environmentally sensitive.
- Mario approached the City of Ottawa and negotiated the gift of the land to the city. The land was appraised by an independent valuator at $1,935,000. The Minister of the Environment certified that the land was ecologically sensitive.
- Mario filed his 2009 tax return claiming the disposition of his land with no resulting income or taxable capital gain because there is a zero inclusion rate for gains realized upon the gift of ecologically sensitive land. In addition, Mario claimed the value of the gift as a charitable gift and used $875,000 of the gift amount on his 2009 tax return.
The CRA assessed Mario on the basis that the land donated was inventory and not capital property and therefore did not qualify for the zero capital gain inclusion rate but rather the gain should be fully taxed as income. In explaining its position, the CRA cited Mario’s experience in the real estate industry and his attempt to develop the land as indications of his intentions with respect to the property. Mario appealed the CRA’s assessment and the case proceeded to the Tax Court of Canada. The judge sided with the taxpayer and allowed the gain to be treated as a capital gain which resulted in a zero inclusion rate. In reaching his decision, the Tax Court judge determined that in respect of the land Mario did not demonstrate any business activities, such as a business plan, a marketing plan or overall strategic plan. Mario was not known in the business community as a real estate developer, but rather as a real estate broker, and the steps he had taken to subdivide and rezone the land did not in and of themselves indicate the existence of a business. Supporting the charitable sector is important to the overall health of society. Charitable gift planning can assist in this objective by ensuring that significant gifts are properly planned to maximize the value of the gift to society and minimize the cost to the taxpayer.
This commentary is published by the Institute in consultation with an editorial board comprised of recognized authorities in the fields of law, life insurance and estate administration.
The Institute is the professional organization that administers and promotes the CLU and the CHS designations in Canada.
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Copywrite ISSN 0382-7038 Julyé Aug 2015
Contributors to this edition:
James W. Kraft, cpa, ca, mtax, tep, cfp, clu, ch.f.c.
Deborah Kraft, mtax, tep, cfp, clu, ch.f.c.