Introduction: Aligning Year-End Tax Planning with Gift Giving
When the holiday season is underway and the calendar year nears its end, it is a great time to support your favourite charities and the causes you care about, while also reducing your tax burden. To encourage charitable giving, the government provides individual taxpayers who donate to a qualified donee a tax credit to reduce their tax payable in the year donation. If the donor taxpayer is a corporation, the corporation can claim a deduction to offset its taxable income. Though many taxpayers frequently make cash donations, donating publicly traded securities to a registered charity is a tax efficient way to give back by enhancing one’s tax benefit. But remember, your donation has to be done by December 31 to receive a tax deduction for the year. In the case of donated securities, the clearing date for the securities transfer to the charity has to take place by December 31.
No Taxable Gain When Gifting Shares of a Security Listed on a Designated Stock Exchange
Normally, when a taxpayer gifts a capital property, such as shares, the Canadian Income Tax Act provides that the taxpayer can elect an amount between the adjusted cost base (what the taxpayer paid for the property) and the fair market value of the property as the proceeds of disposition. This means that the taxpayer can designate the proceeds of disposition to be equal to the adjusted cost base and thereby, not trigger any capital gains, and be issued a receipt for the full fair market value of the gift. However, with the introduction of the split-receipting rules, if the donor taxpayer receives an advantage from the gift, the charity issuing the receipt must take account of the advantage to determine the eligible amount of the gift (i.e., the amount that can be issued on the donation receipt). To determine the eligible amount, the fair market value of the advantage is subtracted from the fair market value of the property. Consequently, if there is an advantage, the donor cannot be issued a receipt equal to the full fair market value of the property. This in turn reduces the amount of the donor’s claimable credit (individually) or deduction (corporations).
With respect to donations of publicly-listed shares in particular, subparagraph 38(a.1)(i) of the Income Tax Act provides that a taxpayer does not incur any capital gains if the taxpayer donates shares listed on a designated stock exchange to a qualified donee. A few things to note about the scope of application of this subparagraph. First, it applies to gifting of shares on a designated stock exchange. A designated stock exchange refers to a stock exchange or part of a stock exchange that has been designated by the Minister of Finance. To date, designated stock exchanges include the Toronto Stock Exchange and many of the major stock exchanges outside of Canada including the New York Stock Exchange, the London Stock Exchange, and the Hong Kong Stock Exchange. For a more comprehensive list of designated stock exchanges, please visit the Department of Finance website. The second aspect to note is that the gifting of shares must be made to a qualified donee. A qualified donee refers to organizations that can issue official donation receipts for gifts they receive from individuals and corporations. Apart from registered charities, qualified donees include registered Canadian amateur athletic associations, registered Canadian municipalities, the United Nations and its agencies, to name a few. If the above two conditions are met, the donor receives a receipt equal to the amount of the fair market value of the shares on the day the gift was made.
As you may have noticed, subparagraph 38(a.1)(i) applies to shares listed on a designated stock exchange. What about gifting shares that are not listed on a designated stock exchange but are shares of a public corporation? In this case, the deemed fair market value rules under subsection 248(35) of the Income Tax Act may apply. If a taxpayer acquires the property less than three years before the day the gift is made or less than 10 years before the day the gift is made and if one of the reasons that the taxpayer acquired the property was to gift the property to a qualified donee, then the donor receives a donation receipt that is the lesser of the gift’s fair market value and its cost to the donor immediately before the gift was made. For this reason, gifting shares listed on a designated stock exchange as opposed to ones that are not generally results in a greater tax benefit.
Pro Tax Tips – Donate Shares that Have Appreciated in Value
Considering the above, what types of publicly listed shares should be donated? Gifting publicly traded shares is advantageous when you are donating shares that have increased in value since you first purchased them. When such a gift is made, the donor receives a receipt equal to the fair market value of the shares, which can be applied to offset the tax payable (individuals) or taxable income (corporations). If you donate shares that have not appreciated in value, a charitable donation receipt will still be issued for the value of shares, but no real tax savings occurs.
Further, gifting publicly traded shares directly to a registered charity results in greater tax savings compared to selling the shares and donating the cash proceeds to the charity. In the former, no taxable capital gains accrue, and the donor receives a receipt equal to the fair market value of the donated shares. In the latter situation, if the donor’s shares have appreciated in value, however, the donor accrues a capital gain. Accordingly, gifting an appreciated publicly traded share directly to a registered compared to gifting the liquidated proceeds of the security confers a greater tax benefit.
To better understand the gifting strategies that are available to you while also supporting the charities that you care about, speak to one of our experienced Canadian tax lawyers on how you can enhance the tax benefits of your donation.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."