The 2019 Federal Budget was uneventful in terms of charitable incentives (journalism aside), but there are two proposals that will directly affect giving. The first relates to donations of cultural property – especially art with foreign origins – and the second to employee stock options. The former represents the reinstatement of a long-standing incentive, while latter an erosion.

Cultural Property

First the good news. The Budget reversed a 2018 federal court ruling that suspended cultural property donations of foreign art. The June 12 ruling was on an export permit for an 1882 oil painting by French Impressionist Gustave Caillebotte. The court denied this painting was of “national importance” as defined by Cultural Property Export and Import Act (CPEIA).

This ruling allowed its English buyer to get an export permit, but it also created a freeze on cultural property donations to Canadian institutions. I described this conflation of the export and donation rules in my previous blog the “cultural property tangle”.

Major museums and galleries immediately started advocating for an amendment to the Income Tax Act and CPEIA to reinstate the tax advantages – nil capital gains and 100% contribution limit — that have been accorded donations of foreign and Canadian art. Budget 2019 restores the donation incentive by changing the definition of “national importance” to downgrade the connection to Canada, while putting the donation rules on firmer footing by untangling the export and donation rules.

There is an irony about this whole episode. CPEIA was born in the nationalist 1970s to protect Canadian art, but now public galleries now seem to be more interested in international art than historical Canadian. The Art Gallery of Ontario has deaccessioned 20 A.Y. Jackson painting, and 17 are for sale at Heffel in May. Meanwhile the dean of art lawyers, Aaron Milrad, observed in Canadian Art that there is an enormous volume of pending donations that have been unlocked by the Budget: “They’re like airplanes waiting to land.”

Stock Option Donations

This judicial erosion of donation tax benefits has now been reversed, but another quiet erosion was ushered in by Budget 2019 without public comment. It relates to donations of the proceeds of employee stock options.

The Budget rolled back the beneficial taxation of employee stock options, capping it employees of mature public companies, but not tech or biotech startups, at $200,000 a year. Pre March 19^th, when stock options were exercised, they were (for the most part) taxed at capital gains rates.

Tied to this regime is a donation incentive. The taxpayer could donate stock or net cash acquired by exercise of the option and eliminate the tax on the exercise in proportion with the donation. The donation had to be made within 30 days of exercise and transferred by the option administrator or its broker per section 110(2.1). Bottom line: the tax treatment was the same as if appreciated public securities were donated.

The increased taxation of employee stock options will discourage future large donations by executives of mature public companies. While this won’t be widely missed by charities, it does chip away at Canada’s overall (generous) system of donation incentives. It also reminds us that many donation incentives are tied to underlying tax features, such as income and capital gains rates, or even cultural property export rules. Stay tuned. We have much to lose.