Charitable Donation Tax Credit

A donation of most types of real estate is eligible for a charitable donation receipt for the eligible amount of the gift. Assuming no advantage is retained or transferred to the donor as a result of the gift, generally speaking the eligible amount of a gift is equal to its fair market value. 

A donor can use the charitable donation receipt to claim a tax credit on his or her tax return and can offset up to 75 per cent of his or her income in any given year.  Any unused donation tax credit can be carried forward for up to five years.  In the year of death, up to 100 per cent of income can be offset. 

Gifts can Trigger Capital Gains Tax

When donating any type of property, the donor is disposing of his or her property. If there is an unrealized gain on that property, subject to certain exceptions (for example, publicly listed securities) a capital gain will be triggered when the property is donated. One half of that gain is income to the donor in the year of the donation and will be taxed accordingly. 

If real estate is sold that is a principal residence (as defined in the Income Tax Act), no tax is payable on any gain on the sale of the property. Thus, if the real estate donated is the donor’s principal residence, no tax will be triggered on the transfer to charity. Please note that an unmarried individual, or a couple if two individuals are spouses, can only have one principal residence for tax purposes.

Cost versus Fair Market Value

If a donor is donating real estate that is not a principal residence and wants to limit the gain triggered by the donation, he or she can make an election under the Income Tax Act. This election allows the value of capital property (which includes most real estate) donated to a charity or other qualified donee to be deemed to be any amount between the cost of the property to the donor and its fair market value on the date of the donation. 

Generally speaking, the cost of the property is the price paid to purchase it, plus the cost of any capital improvements. This option is only available where the fair market value of the property is greater than its cost. If the cost value is chosen, there will be no gain on the transfer to charity.  Depending on the donor’s other income in the year of the donation, he or she may choose any amount between cost and fair market value that is the most beneficial, taking into account tax circumstances in that year.

Charitable Donation Receipt

As with most donations to charity, the donor of a gift of real estate is eligible to receive a charitable donation receipt. The value will be the fair market value of the property or the amount elected between the cost of the property and its fair market value.  It is the charity’s responsibility to determine the value reflected on the receipt. In cases where the property donated is real estate, the charity will work closely with the donor to determine this value. An appraisal will be required.

Gifts of a residual interest in real estate

Another way to make a gift of real estate to charity is to make a gift of a “residual interest” in property. This gift allows the donor to continue to use the property for his or her lifetime. The gift occurs on the date of the gift of the residual interest, not on the death of the donor, so a charitable donation receipt can be issued on the date of the gift of the residual interest. 

The value of the gift will have to be determined by someone with expertise. The fair market value of the interest will depend on the fair market value of the property, current interest rates and the life expectancy of the donor. A gift of a residual interest can result in a capital gain. 

In this circumstance, a reasonable portion of the cost of the property must be attributed to the residual interest in order to determine the amount of the gain.   This will be done on the basis of a weighted average calculation, once the fair market value of the residual interest and the property as a whole have been determined. 

On the donor’s death, the charity will be free to deal with the property as its own, and either retain it for use in its charitable programming or sell it.

Once a gift of the residual interest is complete, the donor will no longer have the right to sell the property; he or she will be limited to a right to use the property for his or her lifetime. Thus, it is important for a donor to be sure that he or she will not need the proceeds of sale of the property as a means of support.

Gifts of Ecologically Sensitive Land

A donor who owns land that qualifies as ecologically sensitive land can, subject to approval by the Minister of Environment and Climate Change Canada, donate it to charity and enjoy certain enhanced tax benefits. 

Specifically, a gift of this type of property will not trigger a capital gain on transfer to the charity and is not subject to the 75 per cent income limit described above.  As well, any unused portion of the donation tax credit can be carried forward up to 10 years. 

The Minster must certify that the land is important to the preservation of Canada’s environmental heritage. The Minister will also determine the fair market value. 

Not all charities are eligible to receive gifts of ecologically sensitive land. To qualify, a charity must have as one its primary purposes “the conservation and protection of Canada’s environmental heritage” or some similar statement of purpose and must apply for eligibility to receive such gifts. 

Gifts of real estate can be a great way to benefit your favourite charity. 

It is a good idea to work with your charity to ensure they accept gifts of real estate, and to ensure that the property you wish to donate is suitable for acceptance by the charity. 

(Stacey is a partner at Norton Rose Fulbright in their estates, trusts and wealth management group and charities and tax exempt organizations group. She provides advice in the areas of wealth management, estate planning, charity and not-for-profit law.)