WEST COAST ENVIRONMENTAL LAW

Giving it Away

Tax Implications of Gifts
to Protect Private Land

Ann Hillyer and Judy Atkins

Copyright © 2004 West Coast Environmental Law Research Foundation

West Coast Environmental Law strives to empower citizens to participate in forming policy for, and making decisions about, protecting our environment. From the local to international level, our work supports the right of the public to have a voice in how we share our earth. Since 1974, we have been providing free legal advice, advocacy, research and law reform services. And through our Environmental Dispute Resolution Fund, we have given away over $2,000,000 to hundreds of citizens' groups across BC to help them solve environmental problems in their own communities.

		West Coast Environmental Law 1001 - 207 West Hastings Stret Vancouver, BC V6B 1H7 Canada phone (604) 684-7378 1 800 330-WCEL fax (604) 684-1312 admin@wcel.org www.wcel.org
		West Coast Environmental Law would like to thank the Real Estate Foundation of British Columbia for their significant financial support of this and numerous other West Coast projects concerning the protection of ecologically valuable private land. We also would like to thank Environment Canada for its generous support of the updating of this publication in 2004, and the Law Foundation of British Columbia for their core funding to West Coast Environmental Law.

We would also like to acknowledge the generous support of the following organizations in the preparation of the original version of this publication:

• the Endswell Foundation,

• the Habitat Conservation Trust Fund,

• Wildlife Habitat Canada; and

• the Ministry of Environment, Lands and Parks.

This guide was originally printed in May 2000 with vegetable based inks. The inside pages were printed on Arbokem Agripulp, a Canadian paper stock composed half of agricultural waste and half of 100% post-consumer recycled fibre, all of which is processed chlorine-free.

Printed in Canada.

Canadian Cataloguing in Publication Data

Hillyer, Ann.
Giving it away

Includes bibliographical references.
ISBN 0-919365-18-3

1. Land value taxation--Canada. 2. Land trusts--Taxation--Canada.
3. Conservation easements--Canada. 4. Gifts--Taxation--Canada. I.
Atkins, Judy. II. West Coast Environmental Law Research
Foundation. III. Title.
KE6289.H54 2000 343.7105’43 C00-910037-7
KF6761.A1H54 2000

Preface

The West Coast Environmental Law Research Foundation (WCELRF) is a non-profit charitable society devoted to legal research and education aimed at protection of the environment and promotion of public participation in environmental decision making. It operates in conjunction with the West Coast Environmental Law Association (WCELA) which provides legal services to concerned members of the public for the same two purposes.

This Guide provides information to government agencies and conservancy organizations about the potential tax benefits and tax liabilities of gifts of land, interests in land and other types of property where the gift is made for the purpose of increasing the protection of ecologically significant spaces or environmentally important features of land. It is a guide to the laws, regulations and policies governing taxation issues that arise when a landowner donates private land or grants a conservation covenant on land to a government agency or a non-government organization that agrees to protect the land in perpetuity.

This Guide was first published in 2000. Since that time there have been a number of changes to the laws, regulations and policies resulting in additional incentives and greater flexibility for landowners wishing to make donations of land or interests in land for conservation purposes. This edition of the Guide includes those changes, current to March 1, 2004.

Readers are reminded that this Guide is educational only and does not constitute legal or tax advice. The examples provided are simplified for the purpose of illustrating specific points in the Guide and do not reflect the complexities taxpayers must deal with in real situations. The legal and tax implications of any transaction depend on the circumstances of the transaction as a whole and on the landowner’s individual circumstances. All parties involved in the legal protection of a specific parcel of land are strongly urged to seek legal and tax advice at their earliest opportunity.

This Guide is also available electronically on our web site at http://www.wcel.org/. West Coast intends to periodically update the Guide when significant changes are made to the Income Tax Act or other relevant legislation. These updates will be available on our web site. To register for our electronic announcement of Guide updates, send your email address to taxguide@wcel.org.

Acknowledgments

The authors are indebted to the staff at West Coast Environmental Law Research Foundation for their assistance in the preparation of the original version and this updated edition of the Guide. Particular thanks go to Chris Rolfe, Linda Nowlan and Catherine Ludgate for their comments and Christopher Heald for computer support, production and desktop publishing.

The authors and West Coast Environmental Law Research Foundation would like to thank the many people who made generous contributions of their time and knowledge to assist us with the preparation of the first and second editions of the Guide. We would like to give special thanks to Susan Mehinagic of Grant Thornton for providing invaluable tax knowledge in updating this Guide.

The updated second edition of this Guide was funded by Environment Canada. The original edition was funded by the Real Estate Foundation of British Columbia, the Endswell Foundation, the Habitat Conservation Trust Fund, Wildlife Habitat Canada and the Ministry of Environment, Lands and Parks. Core funding from the Law Foundation of British Columbia also assisted in the production of this Guide. Funding assistance does not imply endorsement of any statements or information contained in this Guide.

The views expressed are those of the authors and the West Coast Environmental Law Research Foundation. Any errors and omissions are, of course, solely the responsibility of the authors.

Contents

Chapter 1
Introduction

Although the vast majority of land in British Columbia is owned by the Crown, subject to aboriginal rights and title, the remaining private land has ecological, cultural and heritage values of such importance that it is easy to forget private land makes up only about five percent of the land base in the province. These are values that communities frequently want to preserve and protect.

For example, many areas with high biodiversity values and significant ecological features are located in the southern portions of the province on privately owned land. In all parts of the province, humans were drawn to settle in valley bottoms, estuaries and other scenic areas with high environmental values. Much of this area is now privately owned. As the human impact on these critically important areas continues to grow, concerned citizens and conservancy organizations are increasingly focusing their efforts on ways to provide permanent protection for those areas.

The purpose of this Guide

When a landowner wants to protect ecologically special property, there are several options available. For example, the landowner might decide to grant a conservation covenant to a conservancy organization or government organization. Alternatively, the landowner might decide to make a gift of the land itself to a conservancy organization or to the government. Other potential donors may decide to make a gift of cash or property other than land to a conservancy organization to assist the organization in carrying out its conservancy activities. Early in the process of making the decision about whether to make a gift — and what type of gift is appropriate in the circumstances — the donor needs to consider all potential tax implications.

Even though most people readily accept that they must deal with personal tax matters, at least on an annual basis, the very notion of tax consequences associated with protecting private land can send a chill into the heart of the most altruistic donor. There are also tax implications for those agencies and organizations that receive donations. However, the tax consequences often include significant tax benefits.

This Guide is intended to provide landowners, potential donors, conservancy organizations and other recipients of gifts, professionals and others interested in protecting important ecological spaces with information about the possible tax consequences of protecting private land:

• to ensure they have an accurate introduction to the relevant tax aspects of these transactions;

• to illustrate that not all tax consequences are negative — indeed there are tax benefits in many circumstances;

• to ensure landowners and conservancy organizations understand the need for getting their own tax advice from tax professionals early in the process; and

• to offer options that may assist in overcoming tax consequences that appear to pose obstacles to protecting the land.

While this Guide focuses primarily on protecting natural values of land, the gift strategies and tax implications discussed in the Guide are relevant to other protection objectives as well, such as protecting heritage and cultural values of land.

Getting professional advice

This Guide provides educational information only. It does not constitute legal or tax advice in connection with specific properties or specific transactions. It is intended to alert readers to tax related issues so they know to seek tax and legal advice from an appropriate professional. It is essential that landowners considering legal measures to protect their private land and conservancy organizations considering accepting gifts of land, conservation covenants or other property consult with legal and tax advisors at the earliest opportunity.

A word about conservation covenants

This Guide provides general information about the tax consequences of making charitable gifts primarily to conservancy organizations. However, there is a significant focus on giving gifts of land and interests in land, in particular, conservation covenants. Therefore, a brief description of conservation covenants is in order.

A conservation covenant is a statutory instrument or legal tool created by section 219 of the Land Title Act.¹ It was designed for conservation purposes and provides the legal basis for protecting a broad range of ecological, cultural, heritage and other values.

Until 1994, only a provincial or local government body could hold a conservation covenant. The Act was amended that year to allow a conservation covenant to be held by any person designated by the Minister of Environment, Lands and Parks.² In practice, this means that a non-governmental conservancy organization such as a local conservancy or land trust or a large provincial or national conservancy group can now hold a conservation covenant. A conservation covenant also can be held jointly by two or more organizations, one of which can be a provincial or local government agency. Since the 1994 amendment, there has been an explosion of interest in using conservation covenants to protect ecologically important private land in British Columbia.

Essentially, a conservation covenant is a voluntary, written agreement between a landowner and a conservancy organization. It can cover all or just part of a parcel of property. In the agreement, the landowner promises to protect the land in ways that are described in the covenant. For instance, the landowner might agree not to subdivide the land or to provide specific protection for important habitat. The conservancy organization holds the covenant and can enforce it if the owner does not abide by its terms. The conservation covenant is registered on title to the property in the British Columbia Land Title Office under section 219 of the Land Title Act. This ensures that the terms bind future owners of the land, not just the current landowner, since the conservation covenant is intended to last permanently.

Why it is a good tool to protect private land

The language in the legislation allows conservation covenants to be used in a wide range of circumstances. In addition, since a conservation covenant is a written agreement between the parties to the covenant, it is a flexible instrument. A conservation covenant is an effective tool because:

• it can be individually tailored to address the particular ecological features of the land on which it is registered and the specific conservation objectives of the parties;

• a landowner can grant a covenant covering only those areas of the landowner’s property with special significance and can use the remainder of the property without restriction; and

• since 1994, conservation covenants can be held by non-governmental conservancy organizations that focus their time, energy and expertise on protecting ecologically important parcels of land throughout the province; this allows these organizations to harness the considerable interest that exists in communities in protecting many of the special spaces in their area and relieves some of the burden on government to protect land.

Examples of applications

Conservation covenants can be used in a variety of ways to protect private land:

• to protect ecologically valuable features of the land;

• to protect critical habitat for species at risk;

• to provide buffer zones next to parks, wetlands or other environmentally sensitive areas;

• to protect sensitive areas in newly subdivided developments;

• to limit forestry activity on private land to ecologically sustainable forestry;

• to create trail systems and greenways through a number of parcels of adjoining land;

• to protect riparian habitat from logging, clearing or other development; and

• to protect important heritage and cultural sites.

These are just some examples. While there are many types of important values that may be protected by the use of conservation covenants, this Guide focuses on protecting the ecological values of land.

How tax rules are evolving

Tax rules are constantly evolving. The tax rules applicable to gifts made to protect the environment have changed over the past few years. They now offer greater encouragement for the protection of the environment and, more particularly, the protection of ecologically significant lands. It is anticipated that they will continue to evolve as governments further recognize the benefits of encouraging the legal protection of private land and land stewardship through appropriate taxation policy.

This Guide explains the current laws, regulations and policies related to various forms of gifts that are made to protect private land. When using the Guide, be sure to consult your tax professional for information about any recent changes in this area of the law.

Organization of this Guide

The remainder of this Guide covers the following topics:

• income tax issues, including how gifts are treated under the Income Tax Act,³ tax credits and deductions for gifts, the tax treatment of capital property, capital gains, gifts of land and interests in land, gifts of other property, and a brief mention of GST;

• gift planning;

• property tax; and

• property transfer tax.

Chapter 2
Income tax aspects

Donating land or other interests in land, including conservation covenants, to protect and conserve the land may have income tax consequences. Similarly, there may be income tax implications arising from cash donations and donations of other property in kind. Donations may give rise to additional tax liability but also may result in tax benefits, depending on the circumstances.

Generally speaking, when you give a gift to a recipient qualified under the Income Tax Act to issue tax receipts (for example, the federal or provincial government, municipalities, and registered charities), you will receive a tax receipt for the value of the gift. You may then claim a tax credit. Corporations can claim a tax deduction. The size of the tax credit is based on both the value of the gift and your net income for the year. The credit is non-refundable and can only be used to offset any income tax otherwise owing.

The tax credit is subtracted from the amount of federal income tax that you must otherwise pay for the year. The amount of provincial income tax payable is calculated on the basis of the amount of federal tax payable after subtracting the tax credit. The result is a reduction in the amount of both federal and provincial income tax otherwise you would otherwise pay.

The tax credit is calculated as a percentage of the value of the gift up to a maximum of 75% of the donor’s net income for tax purposes for the year. For example, you donate $100,000 cash to a qualified recipient. Your net income for the year is $60,000. You receive a tax receipt for $100,000. The maximum amount on which you can calculate a tax credit in the year of the gift is $45,000, or 75% of your net income of $60,000. After calculating the tax credit, you may deduct the credit from federal tax otherwise payable.

One exception to the 75% limitation is gifts that qualify under the Income Tax Act as “ecological gifts.” There is no limit to the amount of ecological gifts eligible for a tax credit or deduction. Ecological gifts are gifts of ecologically sensitive land that are certified by appropriate officials.

Any part of the value of the gift that you do not choose to claim in the year the gift is made or are not able to claim because of the income limitation may be carried forward for up to five years. You may use any amount of the balance remaining in each of the following five years to claim a tax credit. This allows you to allocate the amount of the value of the gift to maximum tax advantage based on your income. In the example above, if you claimed the maximum tax credit in the year of the gift, $55,000 could be carried forward for up to five years.

A gift is considered a disposition under tax legislation and is deemed under the legislation to give rise to proceeds of the disposition as if it had been sold. In other words, even though you did not receive any money as a result of the donation, for tax purposes, you are considered to have received payment for the property given away. If the gift is of capital property other than cash, for example, land, and the property is worth more at the time of the gift than it was at the time you acquired it, you may realize a capital gain that attracts tax.

You must include 50% of the amount of any capital gain in your income for the year. However, the tax on this additional income generally will be more than offset by the tax credit that you will be able to claim, based on the tax receipt for the value of the gift.

In the case of a gift of capital property that has increased in value and would therefore give rise to a capital gain, you can designate as the value of the gift any amount between your cost of the property and the fair market value of the property at the time of the gift. The lower the amount designated, the lower the amount of the gain. However, the tax benefit will also be for a lower amount and the corresponding tax credit will be less. There may be circumstances in which you would want to designate a lower value, for example, if you were facing a clawback of income-based benefits such as old age pension benefits.

It will likely be necessary for you to have property appraised to determine its fair market value at the time of the gift. Determining the value of the gift is a necessary part of identifying the tax consequences of making the gift. The amount of the tax receipt is based on the value assigned to the gift. So too is the calculation of any gain deemed to have arisen at the time of the gift.

Determining the value of many kinds of gifts is relatively straightforward although it may require the services of a qualified appraiser. However, it may be more difficult to determine the fair market value of covenants and easements.

If land or a covenant is sold rather than donated to the Crown, a conservancy organization or any other purchaser for conservation or any other purposes, the sale is a disposition like any other and the proceeds taxed accordingly. There would be no offsetting tax credit in these circumstances.

Background

Donating land or placing a covenant on land to protect it may have income tax implications. This also may be the case with cash donations and donations of other property in kind. It is important for potential donors to consider the tax consequences of gifts of both land and other kinds of property. The next section of this Guide offers an explanation of the Canadian taxation system, particularly in relation to the tax treatment of gifts.

NOTE: This Guide provides introductory, educational information only. The examples given are hypothetical and have been simplified to explain the basic concepts. This Guide does not constitute legal or tax advice in connection with specific transactions. The tax implications of any transaction depend on the circumstances of the transaction as a whole and on the taxpayer’s individual circumstances and cannot be considered in isolation. It is essential that donors and recipients consult with legal and tax advisors at the earliest opportunity.

Explanation of income tax

Income taxes are levied to generate revenue to finance government operations. The amount of revenue raised by income tax is equal to the tax base multiplied by the rate of tax. Both who is taxable and what kind of income is taxable determine the tax base. The Canadian Constitution⁴ authorizes both the federal Parliament and the provinces to impose income taxes. The provinces are restricted to direct taxation within the province for the purpose of raising revenue for provincial purposes.

Income tax legislation

Income tax law derives from

• the federal Income Tax Act⁵ and the various provincial tax acts,

• the federal Income Tax Regulations,

• tax treaties,

• the Income Tax Application Rules⁶, and

• case law.

The Income Tax Act is the primary source of income tax law in Canada. The federal Cabinet passes Income Tax Regulations under the authority of the Income Tax Act. British Columbia also has its own Income Tax Act.⁷

Canada Revenue Agency

The Canada Revenue Agency (CRA) (formerly Revenue Canada and Canada Customs and Revenue Agency) is the federal department primarily responsible for the administration of the Income Tax Act and for its enforcement. The Income Tax Act defines the “Minister” as the Minister of National Revenue.⁸ In its administration of the Income Tax Act, CRA generates a variety of administrative information including advance rulings, interpretation bulletins, information circulars, and technical interpretations.

Interpretation of Income Tax Act

The Income Tax Act is a complex statute. Many aids to its interpretation exist. The provisions of the Income Tax Act are often litigated and there has been a great deal of consideration of the Income Tax Act by the courts. These court decisions almost always consider the application of the provisions of the Income Tax Act to a particular situation. While court decisions are useful as a guide to interpreting the law, each particular situation or transaction involves different facts. This may materially change the application of the law to the situation.

As noted above, CRA generates explanatory information about the Income Tax Act and other tax legislation.

• CRA gives advance rulings in relation to particular proposed transactions. These rulings are given in relation to the legal aspects rather than the factual aspects of transactions.

• Interpretation bulletins (ITs) represent CRA’s administrative position on various income tax matters.⁹

• Information circulars (ICs) generally deal with administrative matters of a procedural nature such as tax collection, tax avoidance, elections and installment payments.

None of these sources of administrative information generated by CRA has the force of law. Although they are not legally binding, they can be of assistance where there is uncertainty about the meaning of the tax legislation.¹⁰

Other aids to interpretation of tax legislation include the following:

• technical notes and explanations issued by the Department of Finance to explain new legislation; and

• generally accepted accounting principles that can be important where tax legislation is silent about a particular issue.

Finally, the Income Tax Act must be interpreted in light of international tax conventions or treaties that Canada has with other countries to reduce the incidence and effect of double taxation. These tax conventions must be considered when looking at the tax implications of cross-border transactions such as a donation of land by an American resident to a Canadian conservancy organization. A detailed discussion of non-resident taxation issues is beyond the scope of this Guide. Those contemplating a cross-border transaction should consult their tax advisors.

When income tax is payable

Who is taxable

Individuals and corporations are taxable unless exempt from taxation.

Partnerships are not taxable in their own right. The partnership is treated as a conduit for income and individual partners are taxable.

Trusts are taxable in their own right except that a trust is generally treated as a conduit to the extent that income is paid or payable to the beneficiaries of the trust.¹¹

The following entities are among those exempt from the payment of tax:¹²

• municipal authorities;

• corporations owned by the Crown or a municipality;

• registered charities;

• non-profit corporations for scientific research and experimental development;

• labour organizations;

• non-profit organizations; and

• various kinds of trusts including a qualifying environmental trust, formerly known as a mining reclamation trust.

What is taxable

Income tax is a tax on income. Income represents only gains or profits that are realized. It does not include the source of the income, such as the value of property that produces income. Nor does it include any increase in value of property that is not realized, for example, through the sale of the property.

Because income represents only gains or profits, income is what remains after deducting any amounts spent to earn the income. Employment income, however, is taxed on a gross rather than net basis. Only those deductions specifically authorized in the Income Tax Act can be deducted from employment income.¹³

In Canadian tax law, income is classified by its source. For example, the Income Tax Act differentiates among

• income from an office or employment,

• income from a business,

• income from property, and

• capital gains.

Other taxable sources of income include

• pension benefits,

• death benefits,

• alimony and maintenance,

• scholarships,

• research grants, and

• prizes.

Each source of income is subject to its own set of rules under the Income Tax Act and is taxed according to those rules.

Some gains and additions to a person’s wealth such as gifts, inheritances, and windfalls (for example, lottery winnings) are excluded from income for tax purposes. Some other kinds of income are exempt from taxation.¹⁴

A taxpayer pays tax only on his or her taxable income.¹⁵ The Income Tax Act distinguishes between

• total income — the total of all amounts received in the year as income within the meaning of the Income Tax Act,¹⁶

• net income — total income less certain allowable deductions such as professional fees, RRSP contributions, and child care expenses, and

• taxable income — net income less certain allowable deductions such as capital losses and capital gains deductions.

The tax system permits some exemptions, deductions from income (that is, income net of expenses), and tax credits in the calculation of taxable income.¹⁷ These are in addition to the deductions from income of expenses paid out to earn the income or permissible deductions from income from employment. Some of these additional deductions and credits — for example, the financial incentives for taxpayers who contribute to political, charitable, and other public service organizations and the principal residence exemption — will be discussed in detail in this Guide.

An individual who is a Canadian resident, or deemed to be a Canadian resident, is taxed on all of his or her income from both inside and outside Canada. Non-resident individuals are taxed in Canada only on income from Canadian sources.

Time at which tax is payable

Canadian taxpayers are required to pay income tax on a yearly basis.¹⁸ The taxation year may or may not coincide with the calendar year. The taxation year of an individual is the calendar year. The taxation year of a corporation is the corporation’s fiscal year which may not be the same as the calendar year.

Two methods are used for calculating income from business or property — the cash method and the accrual method.

• Cash method. Amounts are included in income when received and expenses are deducted when paid. Income from employment is always calculated on this basis.

• Accrual method. Income is calculated for the period during which it has been earned, whether or not it has been received. This method is used to calculate income from a business or property.

How much tax is payable

Federal tax rates for individuals vary from 16% to 29%¹⁹ of taxable income. The rate increases as the income increases.²⁰ Provinces also impose income taxes. The provincial rates are calculated either at rates set out in the provincial legislation or as a percentage of the federal tax rate. Provincial rates vary from province to province. The provincial tax rate in British Columbia for the 2002 and subsequent taxation years varies from 6.05% to 14.7% of taxable income.²¹ There also may be federal and provincial surtaxes imposed in addition to these amounts.

Gifts under the Income Tax Act

Property owners who make gifts of their land or an interest in their land, such as a conservation covenant, to government or non-profit organizations for the purpose of protecting and conserving the land will be faced with a number of tax consequences. There also are tax consequences of donating property other than land to charities.

Donating property, including land, might result in an increase in a taxpayer’s income for the year. However, the tax system offers incentives through tax relief to those taxpayers, both individual and corporate, who donate to government or charitable, philanthropic, and other public service organizations. The tax relief generally takes the form of deductions from net income for corporations and non-refundable tax credits for individuals.²² The result will usually be beneficial to the taxpayer.

Meaning of “gift” and “property”

A gift is a voluntary transfer of property without consideration, that is, without the expectation of any benefit, advantage, right or privilege in return. The benefit or advantage might be in the form of cash, other property or services. The transfer must be voluntary. Generally, any obligation to transfer land, such as a court order, or, depending on the circumstances, a donation of park land required to obtain development or subdivision approval, would prevent the transfer from being a gift.

“Property” means property of any kind whatever, whether real or personal, and includes a right of any kind, a share of the capital stock of a corporation and the work in progress of a business that is a profession.²³ Conservation covenants fall within the meaning of property. Property, however, does not include services such as time, skills and effort.²⁴

Until recently, to the extent that the person transferring property to another received some benefit or advantage in return for the transfer of property, that transfer was not a gift. For example, where a taxpayer sold property for an amount less than its fair market value, the portion of the value that was, in effect, a gift would not attract the tax benefits associated with gifts. This was true even if the sale was to an organization qualified under the Income Tax Act to receive gifts and give tax receipts. The introduction of “split-receipting” explained below has changed this.

The introduction of “split receipting” allows donors to receive some benefit in return for donating property and to receive a tax receipt for the amount that is a gift.

Split receipting

Draft amendments to the Income Tax Act issued December 20, 2002, but not yet enacted permit the issue of donation receipts in circumstances where an intention to make a gift is present but some benefit (or “advantage”) is also received by the donor.²⁵ These proposed amendments permit the practice of “split-receipting”, by which a qualified recipient can issue donation receipts reporting both the fair market value of property transferred to it and the “eligible amount of the gift”, which is the difference between the fair market value of the property transferred and the value of any advantage to the donor. Under these amendments, the donor’s capital gain is computed based on the fair market value of the property transferred, while the donor’s donation tax credit or deduction is based on the eligible amount of the gift.

On December 24, 2002, CRA proposed guidelines on “split-receipting” to accompany the proposed amendments.²⁶ These guidelines may be followed even though the amendments to the Income Tax Act are not yet enacted.

Under the proposed amendments and guidelines split-receipting is allowed under the following circumstances:

• The transfer of property must be voluntary and the property transferred must have an ascertainable value. If the value of the advantage cannot be ascertained, no charitable tax deduction or credit will be allowed. The amount of the advantage is the value, at the time the gift is made, of any property, service, compensation or other benefit that the donor has received or is entitled to receive, either immediately or in the future and either absolutely or contingently, as partial consideration for, or in gratitude for, the gift.

• The recipient must be qualified to receive the gift.

• The advantage received or obtained by the donor must be identified and , as noted above, its value must be ascertainable.

• The value of the advantage or benefit to the donor and the eligible amount of the gift for which the donor may receive a tax deduction or credit must be recorded on the donation receipt together with the fair market value of the transferred property.

• The donor’s intent to enrich the recipient of the gift must be clear.

The donor is presumed to have intended to enrich the recipient in circumstances where the value of the advantage given to the donor does not exceed 80% of the fair market value of the transferred property. Where the value of the advantage to the donor exceeds 80% of the fair market value of the transferred property, a gift would be recognized only in circumstances where the donor satisfies the federal Minister of National Revenue that the transfer was made with intent to make a gift.

CRA also recognizes that recipients of gifts will sometimes give a token of gratitude or appreciation to the donor. These tokens will not, and have not historically, been regarded by CRA as an advantage or a benefit for the purpose of determining whether or not the value of the advantage or benefit received by the donor exceeds 80 % of the value of the gift. As long as the advantage received by the donor does not exceed the lesser of 10% of the value of the gift or $75, then the advantage is only a token of appreciation that will not be used to calculate the advantage received by the donor. However, if the token is either cash or something that may be easily redeemed such as a gift certificate, then the token must be included in the calculation of the donor’s advantage gained by giving the gift.

Where property subject to a mortgage is donated, all relevant encumbrances and charges on the property will need to be taken into account in determining the value of the gift. For example, if a donor donates a piece of land worth $400,000 and the donee assumes an outstanding mortgage at market conditions on the property worth $200,000, then the donor will have received an advantage of $200,000. Thus, the donor is eligible for a donation receipt of $200,000 – the value of the land ($400,000) minus the value of the advantage to the donor ($200,000).

Mortgages may be “favourable” or “unfavourable”. A favourable mortgage is one where the terms of the mortgage are better than the current market. An unfavourable mortgage is one where the terms of the mortgage are worse than the terms that could be obtained on a mortgage in the current market. For example, if the mortgage interest rate is higher than could be currently obtained, the mortgage would be unfavourable.

If the land in the above example were subject to an unfavourable mortgage, then the advantage received by the donor when the charity assumes the mortgage would be greater. For example, if the $200,000 mortgage had a high interest rate and the donor would have to pay a third party $250,000 to assume the mortgage, then the advantage to the donor would be $250,000 and the donor’s donation receipt would be for $150,000 — the value of the land ($400,000) minus the value of the advantage to the donor of having the mortgage assumed by someone else ($250,000).

Example: Donor owns land with a fair market value of $500,000.

Donor transfers the land to X Conservancy and receives $300,000 in return for the transfer.

The eligible amount of the gift and the amount of the donation receipt is $200,000 – the value of the land ($500,000) minus the value of the advantage received by the donor ($300,000).

Example: Donor transfers land to X Conservancy.

The land is mortgaged for $200,000.

X Conservancy assumes the mortgage.

The assumption of the mortgage by X Conservancy is the only advantage to the donor from the transfer.

The land has a fair market value of $500,000.

The mortgage has an interest rate of 5% which is representative of the current market.

The eligible amount of the gift and the amount of the donation receipt is $300,000 – the value of the land ($500,000) minus the value of the advantage received by the donor ($200,000).

Tax credits or deductions for charitable gifts

An individual may claim a tax credit for charitable donations or gifts that fall within the meaning of “gift” and satisfy the criteria in the Income Tax Act. The value of the gift generally will be determined at the time the gift is given. The recipient will issue to the giver of the gift a tax receipt representing the value of the gift. The tax receipt must be included with the taxpayer’s tax return. Determination of the value of the gift will be discussed in greater detail in the section on valuation.

Where a donor gives a gift to a recipient not qualified under the Income Tax Act to issue tax receipts, the donor will not be eligible to receive a tax receipt. The other tax consequences of the gift described in this Guide may still occur.

To give rise to a tax credit or deduction, the gift must be made to one of the types of entities or organizations specified in the Income Tax Act. These include²⁷

• registered charities,

• Canadian municipalities,

• the United Nations or its agencies; and

• the federal or provincial Crown.

A “registered charity” is one that meets the criteria set out in the Income Tax Act.²⁸

Unless otherwise indicated, the words “gift,” “donation” and “charitable donation” will be used throughout the remainder of this Guide to mean a gift to a recipient qualified under the Income Tax Act to receive gifts and to issue tax receipts for the amount of the gift.

The tax credit for donations is calculated as a percentage of the fair market value of the donation in an amount not exceeding 75% of the individual’s net income. The 75% limitation does not apply to ecological gifts or cultural gifts. Ecological gifts will be discussed in greater detail later in this Guide.

In the case of charitable gifts of capital property such as land, the amount against which a tax credit may be claimed is the total of

• 75% of the donor’s net income plus

• 25% of taxable capital gains plus

• 25% of recapture of any capital cost, allowance arising as a result of the gift.²⁹

In the year of death and the year preceding death there is no limit on qualifying gifts (including gifts made in a will). Gifts made in a will are deemed to have been made immediately before the testator died, that is, in the year of death.³⁰ In addition to claiming a tax credit in the year of death, the representatives of a deceased taxpayer can file an amended tax return for the taxation year preceding the year of death claiming a tax credit to the extent possible for any excess portion of a gift made in the year of death. CRA will refund tax previously paid.

Unused donations may be carried forward for up to five years and, in any of those years, deducted or a tax credit claimed to the extent they were not used in a previous year. Tax credits are non-refundable and may only be used to offset tax liabilities. In other words, if a taxpayer cannot or does not use the full value of donations within the time allotted, the taxpayer loses any remaining benefit. There is no carry forward period for gifts made in the year of death.

Because the tax credit is non-refundable, donors should seek professional advice as to how to maximize the value of the credit. For example, spouses should take into account both the size of their net income and the effect of federal and provincial surtaxes when considering which spouse should claim the donation.

The rate at which the credit may be claimed depends on the amount donated. Individuals receive federal tax credits in the amount of 16% of the first $200 of the total amount of charitable gifts in the year and 29% of any amounts over $200, subject to the limitations explained above.³¹ The credit is a federal tax credit and reduces the amount of federal tax payable.

A similar provincial tax credit for charitable gifts is available in British Columbia.³² In 2003, for example, the combined federal and provincial tax credit is 43.7% of donations in excess of $200.

The amount of gifts over $200 gives rise to a tax credit at the highest marginal rate even though the taxpayer may not be taxed at the highest rate.

Corporations are entitled to deduct their charitable donations and ecological gifts. They do not receive a tax credit. The same limitations and carry over provisions that apply to individuals apply to corporations.

Example: Martha has a net income of $50,000 per year. She receives an inheritance of $50,000 and donates the entire amount in cash to Western Conservancy Association to assist in their campaign to purchase an island and protect the many rare plant species on the island.

             Martha receives a tax receipt for $50,000. In the year of the donation, she may use up to 75% of her income of $50,000, that is, up to $37,500, as the basis for calculating a tax credit for that year. If she claims the maximum tax credit for the year, the federal credit would be (16% x $200) + (29% x $37,300) = $10,849.³³ This would be the amount of the federal tax credit. This amount would be subtracted from the amount of federal tax otherwise payable on her income of $50,000. The balance of the amount of the donation, $12,500, could be carried forward for up to five years.

             Martha could claim a tax credit for as little or as much of the donation or portion of the donation remaining, up to 75% of her net income, each year for five years following the donation. The tax credits are non-refundable. If she does not, or cannot because of the amount of her income, use the whole amount of the donation within the five-year period, she will lose the benefit of the remaining portion.

Types of gifts

Gifts may be present or deferred. ³⁴ Present gifts are those from which the recipient may receive an immediate benefit. Deferred gifts are gifts that cannot be revoked and from which the recipient will not derive a benefit until some time after the gift is given. A gift of a remainder or residual interest in property — for example, where the right to occupy and enjoy the land arises in the future, after the death of the current occupant — and a gift of both the ownership and benefit of an insurance policy, are examples of deferred gifts.³⁵ Both present and deferred gifts give rise to tax consequences in the year the gift is made.

Deferred gifts are treated in a similar way to present gifts. They are dealt with in the year the gift is made. There are differences, however, in the way the value of present and deferred gifts is determined.³⁶

The tax treatment of a gift also depends on the nature of the gift. A gift may be

• cash or

• other property such as

• land,

• interests in land, such as conservation covenants,

• life insurance,

• an equitable interest in a trust,

• listed securities; and

• listed personal property such as art or jewellery, and other personal-use property.

The Income Tax Act also contains specific provisions for certain kinds of gifts of land and personal property. For example, there is a specific category for gifts of ecologically sensitive land and certified cultural property. In addition, dispositions of principal residences and qualified farm property may benefit from tax exemptions under the Income Tax Act.

Some of these types of gifts will be discussed in greater detail below.

Income inclusion or capital gain

Gifts, other than cash gifts, may give rise to the inclusion of an amount in the taxpayer’s income or to a capital gain. The property must be valued at the time of the gift and any gain in the value of the property from the time it was acquired generally must be taken into account in calculating the donor’s income for the year. The donor must account for the gain even though the donor does not actually receive any money or other consideration.

Depending on the circumstances, property may be either capital property, inventory of a business, or an adventure in the nature of trade. For example, if a donor of land buys and sells land as part of its business, the land may be inventory of the business. This might occur if a real estate developer makes a charitable donation of land acquired in the course of its business. In these circumstances, any gain in the value of the land at the time of the transfer would be included in the taxpayer’s income for the year. In other circumstances, the land would be capital property and any gain in the value of the land at the time of the gift would be treated as a capital gain. As discussed below, the tax rate applicable to capital gains is less than that applicable to other types of income.

Tax treatment of capital property

Capital property is generally property in relation to which a gain or loss on disposition would be a capital gain or loss.³⁷ The property might be land or any other kind of property. Property that is inventory of a business is not capital property. One hundred percent of any gain or profit on the disposition of the inventory of a business is included in the taxpayer’s income. In many cases, however, dispositions of land or partial interests in land for conservation purposes will be dispositions of capital property.

Gifts, the death of a taxpayer and the change in use of property result in dispositions for tax purposes. Therefore a gift of capital property may give rise to a capital gain if the property has appreciated in value since the time the taxpayer acquired the property. The gift could also result in a loss. If the property is depreciable property and has depreciated, a terminal loss or recaptured depreciation may arise. It is important to remember, however, that the gift will also result in a tax credit or deduction that will offset the amount of tax on the gain. In addition, there may be exemptions available depending on the kind of property disposed of by the taxpayer.

The death of a taxpayer will bring into the taxpayer’s income for the year a portion of any gain in value of the taxpayer’s capital property unless the beneficiary of the property is the taxpayer’s spouse.

Calculation of gains and losses

Capital gains

Simply speaking, the amount of a gain on the disposition of capital property is determined by subtracting the cost of the property to the taxpayer and the costs related to disposing of the property from the value of the property at the time of disposition.³⁸ The original cost of the property or Valuation Day value, with specified adjustments permitted by the Income Tax Act,³⁹ is called the adjusted cost base. It is the cost of the property for the purpose of calculating whether or not there has been a capital gain.

The entire gain is dealt with in the year of disposition. Generally 50% of the gain will be included in the taxpayer’s income for the year. The remaining 50% of the gain is not taxed.⁴⁰

Example: Sandra sells publicly traded shares for $15,000. The costs associated with selling the shares are $100. She purchased the shares for $8,000 and paid a commission of $150 when she purchased them. The amount of Sandra’s capital gain is $6,750.41
Proceeds of disposition		$ 15,000
minus adjusted cost base	$8,000 + $150	$ 8,150
minus selling costs ($100)	$100	$ 100
Equals capital gain		$ 6,750
$3,375 or 50% of the gain of $6,750 will be included in Sandra’s income for the year.

Capital losses

A capital loss⁴² is a loss arising on the disposition of capital property and certain other specified kinds of property. A disposition of property in an income-earning transaction, such as the sale of inventory, does not give rise to a capital loss. Nor does the disposition of personal-use property.⁴³

A loss is generally the excess of the adjusted cost base of the capital property over the proceeds of disposition of the property less the costs of selling the property. Capital losses may be carried back three years and forward indefinitely.

The deductible portion of the capital loss (the allowable capital loss) may be offset against taxable capital gains. The deductible portion of a capital loss is 50%.

Gifts of capital property

Gifts of capital property, including land and interests in land, are dispositions of the property and could give rise to a capital gain. However, the gift also results in a tax credit or deduction that can be used to offset the tax on the gain.

If a donor makes a gift to a qualified recipient or makes an ecological gift, the donor may designate any amount between the adjusted cost base and fair market value of the property (if the property has increased in value) to be the value of the gift. This amount is deemed to be both the proceeds of disposition of the property and the amount of the donation.

If the donor makes the gift of capital property to the Crown, a municipality, a registered charity or one of the other qualified recipients, or makes an ecological gift, the donor may designate any amount between the adjusted cost base and fair market value of the property (if the property has increased in value) to be the value of the gift. The designated amount is deemed to be the proceeds of disposition of the property and the gain is calculated on the basis of this amount. The designated amount is also deemed to be the amount of the donation. ⁴⁴

If the taxpayer elects the adjusted cost base as the proceeds of disposition, there will be no gain. If the property has appreciated in value and the taxpayer elects an amount that results in a gain, 50% of the gain will be included in the taxpayer’s income. However, the taxpayer is eligible for a tax credit for the gift calculated as a percentage of the total of

• up to 75% of the taxpayer’s income for the year, plus

• 25% of the taxable capital gain, plus

• 25% of recaptured capital cost allowance.⁴⁵

Capital cost allowance is based on the cost of acquiring the property against which it is claimed. It may be claimed only on depreciable property as defined in the Income Tax Act and is claimed at a rate prescribed in the tax legislation. In effect, it is a prescribed rate of depreciation in the value of property. It may only be claimed in relation to depreciable property that is acquired for the purpose of producing income.

Capital cost allowance is deducted from income from a business or property. It allocates the cost of assets over the useful life of the asset. However, when the asset is disposed of, some or all of the capital cost allowance deducted over the years may be recaptured depending on the sale price or fair market value of the asset at the time of disposition.

Land is not depreciable property. However, buildings or other property located on land might be depreciable property, but only if the land and buildings have been used to earn income.

Example: Scenario 1

Robert bought a small tractor for $10,000 for use on his farm. After several years of owning the tractor, he gives the tractor to Western Conservancy Association, a registered charity. This is the only donation Robert makes in the year. Because the tractor is depreciable property that was used in his farming business, Robert claimed capital cost allowance of $7,000 over the years of owning the tractor. The value of the tractor at the time of the gift is $4,000.

Since Robert claimed a total of $7,000 in capital cost allowance over the years, and the tractor depreciated in value by only $6,000, he must include or “recapture” $1,000 of capital cost allowance previously claimed in his income for the year.

Robert had other income in the year of $45,000. Including the $1,000 recaptured capital cost allowance brings his net income to $46,000. He received a tax receipt for $4,000, the amount of the gift. He can claim a tax credit based on the entire $4,000 since it is less than 75% of his income.

Scenario 2

If, on the other hand, the fair market value of the tractor at the time of the gift were greater than the original cost, Robert would have to include all the capital cost allowance claimed, that is, $7,000, in his income. Assume the value of the tractor at the time of the gift is $12,000. Robert must include the capital cost allowance he claimed, $7,000, in his income for the year. He will also have a capital gain of $2,000. $1,000 or 50% of the gain will be included in his income. The gift will therefore result in additional income of $8,000 for the year.

However, Robert can offset the amount of the tax on the additional income by a tax credit. Robert will receive a tax receipt for $12,000. He has a net income for the year of $53,000. If he wishes, he can claim a tax credit in the year calculated against the entire $12,000 (because it is less than 75% of his net income). Alternatively, Robert can carry forward any or all of the $12,000 for up to five years.

Example: Fiona inherited land in 1996 that was valued at $150,000 at the time she received title to the land. She wants to conserve the land in its natural state and in 2003 gives the land to Western Conservancy Association. The gift is not an ecological gift. At the time of the gift, the land has a fair market value of $200,000. Fiona designates the fair market value of the land as the value of the gift. This amount is also the proceeds of disposition. She receives a tax receipt from Western Conservancy Association for $200,000.

Fiona’s adjusted cost base is $150,000. The gift therefore results in a capital gain to Fiona of $50,000 (proceeds of disposition of $200,000 minus adjusted cost base of $150,000). The taxable portion of the capital gain is 50% of $50,000 or $25,000. Fiona’s other income for the year is $40,000. The amount of the gain is included in Fiona’s income for the year bringing her total net income to $65,000.

Fiona is eligible for a tax credit against her 2003 federal tax based on the following calculation:46
75 % of net income	0.75 x $65,000	$ 48,750
Add: 25% of taxable capital gain	0.25 x $25,000	$ 6,250
Tax credit may be calculated on up to		$ 55,000
Possible tax credit for the year
16% of first $200	0.16 x $200	$ 32
Add: 29% of remainder	0.29 x $54,800	$ 15,892
Total tax credit		$ 15,924

If Fiona takes the full tax credit available for the year, she can carry the balance of the donation ($200,000 – $55,000 = $145,000) forward for up to five years. If her income is not high enough in the next five years to use the balance of the donation to claim a tax credit, she will lose the remaining benefit.

For more information about gifts for the purposes of the Income Tax Act see Gifts and Income Tax, P113; Gifts and Official Donation Receipts, IT-110R3; Gifts of Capital Properties to a Charity and Others, IT-288R2; and Gifts to a Charity of a Residual Interest in Real Property or an Equitable Interest in a Trust, IT-226R available on the CRA website at http://www.ccra-adrc.gc.ca/

Capital gains exemptions

Principal residence exemption

Generally, the entire amount of a capital gain on the disposition of a principal residence is exempt from tax. ⁴⁷ This exemption is unlimited. To qualify as a principal residence, the residence must be “a housing unit, a leasehold interest in a housing unit or a share of the capital stock of a co-operative housing corporation acquired for the sole purpose of acquiring the right to inhabit a housing unit owned by the corporation” that is owned and ordinarily inhabited in the year by the taxpayer, the taxpayer’s spouse or a child of the taxpayer.⁴⁸

A taxpayer must designate a residence as his or her principal residence and only one residence can be designated as the taxpayer’s principal residence in any one year. A full tax exemption may not be available for principal residences located on more than half a hectare of land. The definition of “principal residence” generally limits the amount of land on which the exemption may be claimed to one contiguous half-hectare unless the taxpayer can show that more of the land is necessary to the taxpayer’s use and enjoyment of the residence as a residence. Consequently, if a taxpayer’s principal residence is located on four hectares of land and the taxpayer disposes of the principal residence, any gain in the value of the land over and above the one half-hectare may be a capital gain, part of which must be taken into income.

Example: Simon gives his principal residence located on four hectares of land to Western Conservancy Association. He purchased the property for $125,000. The fair market value of the property at the time of the gift is $200,000. He had the property appraised and the appraiser allocated 80% of the value of the property to the principal residence and half-hectare of property.

There is a total capital gain of $75,000 at the time of the gift (fair market value of $200,000 – adjusted cost base of $125,000). 80% of the gain ($60,000), the amount attributable to the principal residence, is not included in Simon’s income and is non-taxable. 20% of the gain ($15,000), the amount attributable to the additional 3½ hectares, is not tax-exempt. 50% of the $15,000 ($7,500) is included in Simon’s income for the year.

Simon receives a tax receipt for $200,000 and can claim a tax credit based on up to 75% of his income in the year of the gift plus 25% of his taxable capital gain of $7,500. He can carry forward any unclaimed portion of his donation for five years.

“Lifetime” capital gains exemption

Prior to 1994, up to $100,000 in capital gains on the disposition of any capital property was exempt from tax in each taxpayer’s lifetime. In 1994, the government eliminated this exemption and provided that taxpayers could elect, as of February 22, 1994, to take any gains accrued to that point on capital property not yet disposed of by the taxpayer. This allowed taxpayers to take advantage of the $100,000 exemption before it was eliminated and resulted in an increased cost base for any assets for which a taxpayer made the election.

Anyone who made an election as of February 22, 1994, should remember to add the elected amount to the cost of the property when calculating any gains or losses on a subsequent disposition of the property.

While the $100,000 general capital gains exemption has been eliminated, certain other capital gains exemptions continue to be available, including exemptions for dispositions of qualified farm property or shares of a qualified small business corporation. However, there is a maximum lifetime capital gains exemption for individuals of $500,000. The $500,000 includes any exemptions claimed under the previous $100,000 exemption and may apply to the disposition of qualified farm property or shares of a qualified small business corporation. Thus, if a taxpayer has used the $100,000 exemption, there is only a $400,000 exemption remaining. The lifetime capital gains exemption does not relate to the principal residence exemption.

Though the application of the $500,000 capital gains exemption may be used to shelter up to $500,000 of capital gains from certain property from income tax, individuals relying on this exemption should obtain professional advice as unforeseen consequences such as liability for alternative minimum tax or clawback of old age security or child tax benefit reduction may result in years when taxpayers avail themselves of these exemptions.

Qualified farm property exemption

The disposition of qualified farm property may give rise to the opportunity to shelter the capital gain with a capital gains exemption.⁴⁹ Qualified farm property includes real property used by the taxpayer or a member of the taxpayer’s family to carry on the business of farming, certain shares of a family farm corporation, an interest in a family farm partnership and certain eligible capital property.

Two distinct rules apply to the qualification of farm property depending on whether the property was acquired before or after June 18, 1987. In addition, the tax rules pertaining to qualified farm properties are quite complex. Professional advice therefore should be sought to determine which rule applies and how the rules apply.

For example, for property acquired after June 17, 1987, to qualify, among other things, it must have been owned by the taxpayer throughout the 24 months prior to its disposition. In addition, in at least two years in which the taxpayer owned the property, the gross revenue from the farming activities must have exceeded the taxpayer’s income from all other sources.⁵⁰ Any gains up to the lifetime maximum of $500,000 realized on the disposition of qualified farm property are exempt from income tax. However, alternative minimum tax may apply.⁵¹

In the example above, if Simon’s property were a qualified farm property, it would be eligible for this exemption. There would be a capital gain, 50% of which Simon would have to include in calculating his net income for the year. However, because of the qualified farm property exemption, Simon could deduct the amount of the taxable gain in calculating his taxable income assuming he had not already claimed the total lifetime exemption of $500,000. In other words, the gain would not be taxable. He could still claim a tax credit based on up to 75% of his net income.

Small business shares exemption

A similar exemption of up to $500,000 is available in relation to gains on the disposition of shares of a qualified small business corporation.⁵² Generally speaking, a qualified small business corporation is a Canadian-controlled private corporation substantially all of the assets of which are used in an active business carried on primarily in Canada. At the date of disposition of the shares, all or substantially all of the fair market value of the assets must relate to assets used in an active business carried on in Canada. For the twenty-four months preceding the disposition, 50% of the fair market value of the assets must have been used in an active business carried on primarily in Canada. The taxpayer or persons related to the taxpayer must have been the only person to own the shares in the 24 months preceding the disposition of the shares.

Assuming there is some portion of the allowable $500,000 exemption remaining, a gift of shares of a qualified small business corporation would be eligible for the exemption.

Gifts of land and interests in land

Donors may wish to give land or an interest in land to conserve and protect the important ecological values of the land. As discussed above, land generally is either capital property or inventory of a business. Each of these is treated differently.

gifts of land that is capital property

Taxpayers who give land⁵³ or an interest in land that is capital property may have a capital gain in the year of the gift and also may be eligible for a tax credit or deduction. To qualify for a tax credit or deduction, the land must be given to a recipient qualified under the Income Tax Act to receive charitable gifts. A gift of land may consist of

• a gift of the land itself so that title to the land is transferred to the recipient of the gift, or

• a gift of an interest in the land such as

• an easement,

• a covenant, or

• a remainder or residual interest in land.

An easement is a right of use, generally a right of passage over another’s land. An easement might prevent the owner of the land subject to the easement from doing certain things specified in the easement document. It also might require the landowner to do certain things. At the same time, the easement provides a benefit to the owner of adjacent or nearby land, for example by allowing that owner to pass over the land against which the easement is registered.

A covenant is a written document in which those signing the covenant commit to do or not do certain things or agree on a certain set of facts. Generally, a covenant contains promises by a landowner in relation to uses of the land limiting or prescribing the uses to which the land will be put. Covenants are frequently used to control the use of property or to preserve it.

A remainder or residual interest in land is a right to enjoy or own the land in the future. It is the interest left over after property was used and enjoyed first by another person for his or her lifetime or for a specified period of time.⁵⁴ A gift of a remainder or residual interest in land is a deferred gift and a present value for the gift must be calculated.

Gifts of title to land or other interests in land are subject to the general considerations outlined above respecting gifts and are eligible for a tax credit based on up to 75% of the taxpayer’s income. If the land is capital property, the limit against which a tax credit may be claimed will be increased by 25% of any taxable capital gain and 25% of any recaptured capital cost allowance paid on any depreciable property, including buildings, located on the land.⁵⁵

Although this formula is clear, determining both the original cost and the value of a covenant at the time of its disposition may present difficulties. These difficulties are discussed below.

Example: Frances has owned a piece of vacant land since 1996. She gives the vacant land to Western Conservancy Association to preserve the natural values of the land, but does not make an ecological gift of the land. Frances bought the land for $75,000. This is also her adjusted cost base for the land.⁵⁶ At the time of the gift, the land is appraised at $125,000. Frances designates this as the value of the gift. The proceeds of disposition are therefore $125,000. Frances has a net income of $45,000 for the year before the gift.

There is a deemed capital gain of $50,000 from the gift. 50% of the gain, or $25,000, is taxable and is added to her net income for the year. Her total net income for the year is $70,000.

Frances receives a tax receipt from Western Conservancy Association for $125,000, the full value of the land. The limit of her income against which she can claim a tax credit is $58,750:

75% of net income of $70,000	0.75 x $70,000	$52,500
Add: 25% of taxable capital gain of $25,000	0.25 x $25,000	$ 6,250
Federal tax credit calculated as percentage of		$ 58,750
16% of first $200	0.16 x $200	$ 32
Add: 29% of balance	0.29 x $58,550	$ 16,980
Federal tax credit		$ 17,012

If Frances is able to and chooses, she can claim the maximum tax credit and carry forward $66,250, the balance of the donation, for five years.⁵⁷ The tax benefit from the donation will offset the taxable capital gain and provide a significant additional credit against federal tax otherwise payable.

Alternatively, Frances may choose to claim a lower tax credit in the year of the gift and spread the benefit of the donation over the next five years.

gifts of inventory land

Gifts of inventory lands do not attract the same tax benefits as gifts of capital property. A donor of inventory lands must include the fair market value of the land donated in its income for the year. The donor may deduct from income the cost of the land and any other allowable costs capitalized relevant to the land, which may include financing costs, costs related to acquiring the land, ongoing maintenance costs and other allowable costs. All the profit derived from the disposition of inventory lands (selling price less cost of the land and other allowable costs) must be included in the taxpayer’s income for the year. In the case of capital property on which there is a capital gain, however, only 50% of a capital gain must be included in income. (As discussed below, for ecological gifts, the inclusion amount is 25% of the capital gain.)

The result is that the tax implications of making a gift of land from inventory are essentially the same as those of making a cash donation. The Income Tax Act does not currently offer any tax incentives for businesses to donate inventory property such as land rather than cash.

Examples

Delightful Developments Ltd. donated 30 acres of land to Western Conservancy Association. The land was part of a larger parcel Delightful bought with the intention of subdividing it into five acre parcels. Delightful’s costs attributable to the 30 acres were $100,000. At the time of the gift, the fair market value of the land was $250,000. The land is considered inventory of Delightful’s business. Delightful has other income of $800,000 from land sales for the year and other costs of $600,000.⁵⁸

Example 1

Sales of land 800,000

Value of land donated 250,000

Gross income 1,050,000

Less costs (including $100,000 costs

associated with donated land) 700,000

Net income 350,000

Less deduction for donated land 250,000

Taxable income 100,000

Example 2

Instead of donating it, Delightful sells the land for fair market value and makes a cash donation of $250,000 to the conservation organization.

Sales of land (and gross income) $1,050,000

Less costs as above 700,000

Net income 350,000

Less deduction for cash donation 250,000

Taxable income 100,000

Example 3

Delightful donates land of the same value which is capital property not inventory. The adjusted cost base of the land is $100,000. The capital gain would be $150,000 (fair market value of $250,000 less adjusted cost base of $100,000). Delightful must include 50% of the gain in income.

Sales of land $ 800,000

Taxable capital gain (50% of $150,000) 75,000

Gross income 875,000

Less costs 600,000

Net income 275,000

Less deduction for donated land 225,000⁵⁹

Taxable income 50,000

As the examples show, the tax incentives are greater for gifts of capital property than for gifts of inventory.

Ecological gifts

An ecological gift is a gift of ecologically sensitive land that meets certain criteria in the Income Tax Act.⁶⁰ The gift may be an outright gift of the land itself so that title to the land passes from the giver to the receiver. Alternatively, the gift may take the form of a covenant, easement or servitude.⁶¹

To qualify for a tax credit or deduction, the gift must be

• a gift of land (including a covenant, easement or servitude) certified by the federal Minister of the Environment (or a person designated by the Minister) to be ecologically sensitive land, the conservation and protection of which is, in the opinion of the Minister or designate, important to the preservation of Canada’s environmental heritage; and

• made to

• Canada,

• a province or territory of Canada,

• a municipality in Canada; or

• a registered charity, one of the main purposes of which is, in the opinion of the Minister or designate, the conservation and protection of Canada’s environmental heritage, and which is approved by the Minister or designate as an acceptable recipient of the gift.

In addition, the fair market value of the ecological gift must be certified by the Minister of the Environment.

If the gift meets the above criteria, a tax credit or deduction may be claimed based on the full fair market value of the property or the value of the covenant, easement or servitude. Tax credits claimed in respect of ecological gifts are not subject to the 75% income limitation. The full value of the gift may be used to calculate the tax credit limited only by the extent to which the donor’s income will allow the credit to be used. This is one advantage of ecological gifts over other gifts of land.

In addition, ecological gifts of capital property benefit from a reduced capital gains inclusion rate. Only 25% of a capital gain deemed to arise on a gift of capital property must by included in the donor’s income for the year if the gift is an ecological gift. As we have seen, for other gifts of capital property, 50% of the gain must be included.

Another potential advantage of ecological gifts arises from the certification process described below. The certification process and the tax that can be imposed by CRA on an unauthorized disposition or change of use of land given as an ecological gift may provide additional security to the donor that the gift will be used for the purpose for which it was intended.

However, because both the land itself and the value of the ecological gift must be certified, the process of donating has additional requirements which may add to the time involved in making the gift. Those contemplating giving an ecological gift should explore the extent to which they will be able to benefit from the advantages with their tax and legal advisors.

Ecological gifts generally will be gifts of capital property and may give rise to a capital gain. However, any such gain would be offset by the availability of a tax credit calculated against up to 100% of the taxpayer’s income. As with other gifts, any portion not claimed in the year of the gift may be carried forward and deducted to the extent chosen by the individual for five years following the gift.

Gifts of inventory land qualify as ecological gifts. However, as explained above, the tax benefits associated with gifts of inventory land are not as great as with gifts of land that is capital property. The full value of the land less costs and expenses associated with it must be taken into the taxpayer’s income for the year while, in the case of capital property, only 25% of any capital gain will be included. The other benefits associated with ecological gifts apply.

To date, over 280 ecogifts valued at over $64 million have been donated across Canada, protecting nearly 22,000 hectares of wildlife habitat. More than one-third of these ecogifts contain areas designated as being of national or provincial significance, and many are home to some of Canada's species at risk.⁶²

Process for certifying ecological gifts

In order to qualify as an ecological gift,

• the land that is the subject of the gift must be ecologically sensitive land and certified as such by the Minister of the Environment or a person designated by the Minister;

• the recipient must be qualified to receive the ecological gift; and

• the fair market value of the land that is the subject of the gift must be determined by the Minister.

Certification of land as ecologically sensitive

Environment Canada has developed a general national definition for “ecologically sensitive land.” Ecologically sensitive land includes:

• areas identified, designated, or protected by a local, provincial, territorial, national, or international system or body as ecologically significant or important;

• natural spaces of significance to the environment in which they are located;

• areas that have significant current, or potential for, enhanced ecological values as a result of their geographic proximity to other significant properties;

• areas, whether urban or rural, that are zoned for conservation purposes such as "green space" but excluding those zoned for such exclusive land uses as agricultural production;

• natural buffers around environmentally sensitive areas such as water bodies, beaches, streams, or wetlands; and

• areas that contribute to the maintenance of biodiversity or Canada's environmental heritage.⁶³

At the time of writing, Ontario, Quebec, Prince Edward Island and New Brunswick also had developed expanded provincial criteria for identifying ecologically sensitive land.⁶⁴

Other criteria

There are a number of other criteria for determining what lands qualify as ecological gifts. For example, land must be privately owned for the gift to qualify as an ecological gift. Donations of leased Crown land do not qualify.

If ecologically sensitive land is contained within a larger parcel of land and the entire parcel is donated, the entire donated property qualifies as an ecological gift.

Only full transfers of title and transfers of covenants, easements and servitudes established through common law or legislation qualify.⁶⁵ For example, a transfer of an interest in a trust that held ecologically sensitive land would not qualify as an ecological gift.

Designated certification authorities in British Columbia

To qualify as an ecological gift, land must be certified as ecologically sensitive by the federal Minister of the Environment or designate.⁶⁶ The Minister of the Environment has designated six Environment Canada senior managers to act as federal certifying authorities. One of these is the Regional Director, Pacific and Yukon Region, for Environmental Conservation.

In addition, provincial authorities are sometimes designated through federal-provincial agreements or other administrative arrangements. As well, some non-government co