In an effort to preserve Canada’s environmental heritage and encourage donations of ecologically sensitive land (and related easements, covenants and servitudes on such land) (“ESL”) while avoiding conflicts of interest, the Budget limits the donation regime for gifts of ESL.
Under the existing regime for gifts of ESL, donors of ESL are exempt from capital gains tax on the gift and entitled to claim a tax credit (individuals) or a tax deduction (corporations) for the eligible amount of the gift, up to 100% of their income. These tax benefits may be carried forward for a period of 10 years. In order to obtain these tax benefits, however, the ESL must be certified by the Minister of Environment and Climate Change Canada (“ECCC”) as land that is “ecologically sensitive” and is thereby important to conserve and protect as part of Canada’s environmental heritage. The Minister of ECCC must also approve transfers of ESL to charities and certify the fair market value (“FMV”) of the land.
Budget 2017 contains three proposals to amend the existing regime: (1) imposition of a new tax in certain situations where ESL is transferred between organizations; (2) prohibition on the receipt of gifts of ESL by private foundations; and (3) new measures to encourage more gifts of ESL in Québec.
It is proposed that each of these measures will apply to gifts of ESL that occur on or after March 22, 2017 (“Budget Day”).
(a) New Measures to Protect Future Use
Under the Tax Act, where a charity, municipality in Canada or municipal or public body performing a function of government in Canada (the “Donee”) receives a gift of ESL and, without consent from the Minister of ECCC, either: (i) disposes of the ESL; or (ii) changes the use of the ESL, the Donee is subject to a tax equal to 50% of the FMV of the ESL. The measures proposed in the Budget extend the 50% tax beyond situations where a Donee receives a donation of ESL to situations where a Donee subsequently sells the ESL to a third-party. Specifically, the Budget proposes that a tax equal to 50% of the FMV of the ESL will be imposed upon a purchaser of ESL where the purchaser, without consent from the Minister of ECCC, either: (i) disposes of the ESL; or (ii) changes the use of the ESL.
CRA will be responsible for assessing and collecting the applicable tax.
Under the new rules, the Minister of ECCC’s ability to determine whether proposed changes to the use of land would degrade conservation protections will be clarified.
Additionally, the Budget proposes to amend the approval process for certain recipients of ESL. Currently, where the recipient is a registered charity, the Minister of ECCC must approve the charity as an eligible recipient of ESL on a gift-by-gift basis. However, municipalities and municipal and public bodies performing a function of government are automatically eligible to receive gifts of ESL. The Budget thus proposes to eliminate the automatic approval of municipalities and municipal and public bodies performing a function of government as eligible recipients of ESL and subject these entities to approval on a gift-by-gift basis.
As indicated in the Budget, this measure is intended “to ensure that recipients of ‘ecogifts’ are focused on the long-term protection of ecologically sensitive land.”
(b) Private Foundations Excluded from Gift Regime
Budget 2017 proposes to prohibit private foundation from receiving gifts of ESL. As the Budget explains, the ability of private foundations to receive such gifts gives rise to potential conflicts of interest. The Budget gives the following example of a conflict of interest involving a gift of ESL:
“[W]here a director of a private foundation donates an easement in respect of a property to the private foundation, the individuals responsible for enforcing the private foundation’s rights under the easement would often be the same persons as those against whom the rights must be enforced.”
(c) Gifts of ESL in Québec
Servitudes are the subjection of real property to an easement. Pursuant to Québec civil law, both real and personal servitudes can exist. A real servitude exists where a charge on land grants the rights of dominant property over the rights of servient property. A personal servitude exists where a charge on land grants rights in property to a particular person. Under the current ESL regime, only real servitudes may be donated, since personal servitudes cannot run in perpetuity. Since the conditions for real servitude can be difficult to meet, Budget 2017 proposes to amend the Tax Act to allow donations of personal servitudes to qualify as gifts of ESL. Qualifying donations will be required to meet a number of conditions, including a requirement that the personal servitude run for at least 100 years.