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 donor.
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.