Sunday, May 17, 2009

Tax Benefits of Ecological Gifts in Canada

Do you own ecologically sensitive land in Canada? Do you want to preserve the lands natural features and habitat indefinitely?

If so, there are a number of ways that you can do that, a few of which I will be writing about in a series of posts on ecological gifts.

The Canadian Government has made gifts of ecologically sensitive land to certain organizations in order to protect the land attractive by providing generous tax benefits. As I will discuss in a future post, it is even possible to continue to own and enjoy the land (subject to some restrictions on use), while receiving some tax benefits now.

In this post, I am going to discuss the tax advantages of gift of ecologically sensitive lands to qualifying organizations. (I will save a discussion on what qualifies as ecologically sensitive land, and what organizations qualify for later posts.)

There are two significant tax advantages to making gifts of ecologically sensitive land to qualifying organizations. First, you will receive a charitable tax credit for the value of the gift. The federal tax credit, as of 2008, was 15% on the first $200 and 29% for all amounts over $200. In addition to the federal tax credits, each province provides further tax credits, which vary from province to province.

In contrast to most other charitable tax credits, there is no limit to the amount you can claim in any one year for a gift of ecologically sensitive land, except that the credits are non-refundable. This means that you can use the credits to reduce your income tax to zero, but the government won’t pay you anything after you have used your credits to offset all of the income tax you would otherwise have to pay.

What if you are not able to use the full amount of your charitable tax credit in the year you make the gift? You can carry the unused tax credits forward to apply it to income in future years. You can carry the credits forward for up to five years.

The second significant advantage to ecological gifts is that you can avoid capital gains tax on the gift.

In many cases, if you sell land at a profit the profit will be taxed as capital gains. For example, if you bought land for $200,000, in 1995 and now sell it for $400,000; you will have capital gains of $200,000. Half of the $200,000 is then brought into your income, and you will have to pay income taxes on $100,000 of income. (I have simplified this somewhat).

But, using this example, if the land is ecologically sensitive, and you give the land to a qualifying organization, you will not have to pay any tax on the $200,000 capital gain, but will still get a tax credit for a $400,000 gift. This is more attractive than if you sold the land for $400,000, paid capital gains tax, and then gave the sale proceeds to charity.

You should note that not all land will be taxed as capital gains. For example, if the land you own is inventory rather than capital property, then this benefit will not be available to you. Or, on the other hand, if the land qualifies for your principal residence exemption, it will be exempt from capital gains anyway.

Environment Canada provides some examples with calculations of the tax benefits for gifts under its ecological gift program here. You may also wish to read The Canadian Ecological Gifts Program Handbook 2005.

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