On Monday, March 19, 2007, the Department of Finance announced measures to encourage charitable giving to private foundations in Canada.
The Budget proposes that, effective March 19, 2007, where a taxpayer donates publicly-listed securities to a private foundation, the associated capital gains will be reduced to zero. Additionally, where an employee, who deals at arms-length with his or her employer acquires stock options and donates these within 30 days to a private foundation, an additional deduction will be available to offset the related employment income.
These changes bring the treatment of donations of publicly-listed securities to private foundations in line with the generous treatment already afforded to such donations to charitable organizations and public foundations.
These incentives have not previously been available for donations to private foundations due to concerns about the potential for “self-dealing,” which can occur where individuals with significant holdings in a corporation also have influence over the management of a foundation's holdings of the same corporation. This might occur, for example, where a non-arm's length donor to a private foundation is in a position to exercise control over donated shares for his or her benefit, rather than for the benefit of the foundation.
Budget 2007 therefore proposes to limit the share ownership of private foundations based on the relative size of holdings by foundations and non-arm's length persons in a particular corporation. The full details of this proposal are available at http://www.fin.gc.ca.
Effective for taxation years beginning after March, 19, 2007, a private foundation that owns more than 2% of any share class of a corporation will be required to report its holdings, and those of non-arm's length persons, to the Canada Revenue Agency on the foundation's annual information return. Where the holdings of the foundation exceed 2% and the combined holdings of the foundation and all non-arm's length persons exceed 20%, a divestiture will be required. The divestiture must occur within set periods of time, otherwise the private foundation may be subject to monetary penalties.
Budget 2007 also sets out a transitional period for private foundations to bring existing share holdings in line with these proposals. These timeframes vary depending on the size of the holdings, and range between five and twenty years. However, to encourage private foundations to complete this transition in a timely manner, the Budget proposes that donations to a private foundation that has not completed this transition by the end of its taxation year beginning on or after March 19, 2012, will cease to qualify for the preferential capital gains treatment.
For more information on this and other measures contained in Budget 2007, please consult the Web site of the Department of Finance at http://www.fin.gc.ca.
