The Budget introduces a change that is designed to curb the
misuse of the regime for donations of cultural property through
abusive tax shelters.
Under the Tax Act, special deeming provisions apply to gifted
property that was acquired by the donor as part of a tax shelter
gifting arrangement or to property that was held by the donor for
less than three years (ten years if the donated property was
acquired with the intention of donation) before being donated. In
these circumstances, the value of the property is deemed to be no
greater than its cost to the donor. This provision is designed to
prevent abusive tax shelter arrangements in which property is
acquired by a donor and then donated for a purported value that far
exceeds the cost of the property to the donor.
Gifts of certified cultural property have been exempt
historically from this anti-avoidance rule. The Tax Act provides
for a special process by which a proposed gift can be certified as
"cultural property" and valued formally. Gifts of
cultural property can be claimed up to 100% of income and benefit
from a full capital gains exemption. This treatment is designed to
encourage the donation of culturally significant property and
artefacts to preserve Canada's national heritage.
The Government has evidently determined that the official
valuation and certification process for gifts of cultural property
does not provide sufficient safeguards against abuse by tax shelter
promoters. As such, the Budget proposes to remove the exemption
noted above. Beginning on Budget Day, the value of gifts of
cultural property that were acquired as part of a tax shelter
arrangement or acquired shortly before the date of the donation
will be deemed to have been made at no more than the cost to the
While some could question whether this change was necessary, we
have certainly reviewed tax shelters involving cultural property
that somehow increased in value dramatically between donor
acquisition and donation immediately afterward. This change is
therefore consistent with the ongoing push by the Government to
shut down abusive tax shelters. Charities that participate in
abusive tax shelters should expect to be audited and in many cases
sanctioned by CRA. Donors to most tax shelters should also
expect to be reassessed and/or have their tax credits delayed until
the resolution of the audit of the tax shelter. Given these risks,
our general advice is for both charities and donors to avoid most
donation tax shelter arrangements altogether.
This measure will apply to donations made on or after Budget
Day. While the change may no doubt prevent or delay a small number
of legitimate gifts of cultural property, it is perhaps
understandable in the context of some of the cultural property
donation schemes that have been sold in recent years.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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