The 2015 Federal Budget contains measures that will extend the exemption of capital gains to proceeds of sales of real estate and private companies. In a welcome move, the Budget also announces the ability of charitable organizations and foundations to diversify their investments.

Extension of Exemption of Capital Gains

Capital gains realized on the donation of publicly-traded securities directly to registered charities are exempt from tax. The exemption applies also to donations of ecologically-sensitive land and certain cultural property.

Starting in 2017 the Budget proposes to extend this favourable tax treatment to donations of cash to a charity following the sale of real estate or private company shares. The portion of the capital gain that will be exempt will be based on the proportion of the cash donated to the total proceeds from the disposition. In order to qualify for this exemption, the cash must be donated within 30 days after the disposition. There are a number of conditions that must be met including the relationship of the donor and the registered charity to the purchaser of the property. There will be additional anti-avoidance measures, which, if they apply, will reverse the exemption.

Eligible Investments now Diversified

Under provincial law, a partnership is generally considered to be a relationship among persons carrying on business with a view to profit. Charitable organizations and foundations generally do not invest in a partnership because their ability to carry on a business is either restricted or precluded. Effective immediately, they will be able to diversify their investments by holding investments in limited partnerships.

Under the new rules, a registered charity will not be considered to be carrying on a business solely because it acquires or holds an interest in a limited partnership. To ensure that the investment is a passive investment, there are a number of conditions. The investment must represent less than 20% of the interests in the limited partnership. The 20% threshold will include limited partnership interests held by parties not dealing at arm's length with the charity. As well, the charity must deal at arm's length with each general partner of the limited partnership.

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