Profession > Tax Strategy
Gifting Shares
A planned gift of shares to a charity comes wrapped in a complex set of tax rules.
FROM: MAR-APR 2007 ISSUE | BY FRANCINE ST-ONGE
Planned giving allows donors to maximize tax benefits when gifting shares to charity. But when it comes to tax treatment, different rules apply to different types of shares.
Listed Shares
When listed shares are given to a qualified donee, there is a deemed disposition at fair market value (FMV). If a capital gain results, the inclusion rate is reduced to zero (25 per cent for gifts made before May 2, 2006) if the gift is made to a qualified donee that is not a private foundation. For gifts to private foundations, the inclusion rate is 50 per cent. Also, a donation tax credit will be granted on an amount corresponding to the FMV of the shares.
Consider the case of Conrad, who gives a public charity some listed shares with an FMV of $200,000 and an adjusted cost base (ACB) of $20,000. Conrad realizes a capital gain of $180,000, but since the inclusion rate is zero, he has no taxable capital gain. He may also receive a donation tax credit on $200,000. However, an annual ceiling of 75 per cent of his income must be taken into account. The unused portion of the gift may be carried forward for up to five years. The result is the same as if Conrad had given $200,000 in cash.
Unlisted Shares
When the shares are unlisted, as with the shares of a private corporation, the rules are different. The first difference is that the FMV of the shares is deemed to correspond to their ACB when they were acquired less than three years before the donation. The period is 10 years if it is reasonable to conclude that one of the main motives for the acquisition was to donate them. However, this presumption does not apply to a share issued by a corporation to a donor who controls the corporation, either alone or with related persons, immediately before the donation, where the consideration given for the shares would not be subject to the three-year rule. This would occur, for example, where the shares were issued in exchange for listed shares or shares held for more than three years, as might be the case with shares issued in a reorganization of capital.
The second difference is that the rule of inclusion of 50 per cent of the capital gain applies when the FMV of the shares exceeds their ACB. The amount of the capital gain to be included in the donee’s total income may be reduced by electing to consider that the amount of the gift is less than the FMV but greater than the ACB of the shares. The amount chosen becomes the proceeds of disposition of the shares and the amount of the gift eligible for the tax credit. There is generally no advantage in doing this, since the annual ceiling for donations is 75 per cent of net income plus 25 per cent of the taxable capital gain realized on the disposition of the donated shares.
Credit Deferral
Finally, the taxpayer can defer the time at which the gift is recognized for tax credit purposes when it is made to a private foundation and the donor or his estate has a non-arm’s length relationship with the corporation immediately after the donation. These complex rules merit careful attention.
For example, Donald, the sole shareholder of XYZ for the past 25 years, carries out an estate freeze in favour of his children and receives $2 million worth of preferred shares in exchange for his common shares. He then gives $200,000 worth of preferred shares, with an ACB of $20,000, to a public charity. Prior to the donation, his income is $100,000.
From a taxation standpoint, this is a gift of $200,000, since the preferred shares, although not held for more than three years, were issued as consideration for shares that had been held for 25 years. Donald realizes a taxable capital gain of $90,000, which he must include in his income. The ceiling for donations during the year of the gift is $165,000 or 75 per cent of $190,000 ($100,000 + $90,000) plus 25 per cent of $90,000. The donation tax credit cancels out the capital gain included in income plus 75 per cent of the income from other sources. The unused balance can be claimed in the subsequent five years.
The gift of a charitable donation is generous and kind-hearted, and the person who donates wisely is both kind-hearted and financially savvy.
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Francine St-Onge , BBA, BCL, LLB, FCGA, practises tax and corporate law in Sutton, Quebec. She is co-author of the CGA-Canada course Taxation 2.
“Tax Strategy” is co-ordinated by J. Thomas McCallum, CBV, FCGA, a business valuation and income tax consultant based in Whitby, Ontario, and author of several CGA-Canada professional development courses. E-mail jtmc@jthomasmccallum.com.
The information appearing in “Tax Strategy” is provided for the interest of the readers. Neither CGA Magazine nor the column authors and co-ordinator assumes any responsibility or liability to any persons relying on the information in the article to perform tax planning and/or compliance of any kind.