The Department of Finance has used an administrative power under the Income Tax Act to allow an American charity, the American Friends of Canadian Land Trusts, “prescribed donee” status. This designation allows U.S. residents to get domestic tax relief when donating Canadian land to a U.S. charity without being subject to Canadian capital gains taxation.
One way to eliminate capital gains tax on a transfer of land or other property to a Canadian charity is to make an election under the Income Tax Act (the “Act”) to value the land at its adjusted cost base when making the gift. While a U.S. resident can make such an election, there is a problem, which the Department of Finance summarized as follows in a backgrounder to its announcement that the American Friends of Canadian Land Trusts is now a prescribed donee:
[Under the Canadian-U.S. Tax Treaty], if a U.S. resident makes a donation of any kind directly to a Canadian charity, the deduction available to that person under U.S. tax law and the Canada-U.S. Tax Treaty is limited to their Canadian-source income. This creates an impediment for a U.S. resident if the donated property is taxable Canadian property, such as real property in Canada, because the U.S. resident would have to pay capital gains tax in Canada (which would otherwise be offset by the Canadian charitable donations tax credit, if the donation were made to a Canadian charity) in order to obtain tax relief in the U.S.
This dilemma can be resolved if the gift is real property in Canada that is donated to a U.S. charity that is a prescribed donee. In this case, the U.S. resident is permitted to make the election to reduce the capital gain that would otherwise be taxable in Canada, while still retaining the right under U.S. tax law for charitable donations tax relief. The Canadian tax treatment places the U.S. resident in the same position for Canadian tax purposes as if the donation had been made to a Canadian registered charity or other qualified donee in Canada.
The election under the Act to reduce the value for Canadian tax purposes applies only if the gift is real property in Canada and the prescribed donee undertakes that the property will be held for use in the public interest.
The American Friends of Canadian Land Trusts intends to satisfy this undertaking by facilitating the acquisition, by Canadian land trusts and conservation organizations, of Canadian lands and interests or rights (for example, easements) in Canadian lands. Its purposes include the preservation of Canadian lands.
U.S. residents considering charitable donations of Canadian land should keep in mind the option of donating to a prescribed donee.