Canada: Gifting Flow-Through Shares To Charities

Last Updated: March 28 2008
Article by Jennifer Leve

Most Read Contributor in Canada, September 2016

A recent Canada Revenue Agency ("CRA") advance tax ruling (CRA document number 2007-0242361R3) addresses a gifting arrangement1 whereby flow-through shares are donated to charities by individual donors. The structure is designed to reduce the donor's cost of giving by taking advantage of the Canadian Exploration Expense (CEE) as well as the elimination of tax on capital gains on the donation of publicly listed shares to charities.

The gifting arrangement considered by CRA was structured as follows:

A donor, wishing to make a donation to a charity of its choice, opens and funds a brokerage account. Flow-through shares are purchased on behalf of the donor, who then immediately donates them to a charity or charities that have been designated by the donor. The shares are publicly listed and have a fair market value independent of their CEE entitlement, and are subject to a four-month hold period during which they may not be traded without restarting the hold period.2 The charity immediately sells the donated shares to a pre-arranged third-party buyer, usually a financial institution. Upon acquisition of the flow-through shares, the donor may deduct CEE renounced in respect of such shares, and when the shares are donated, the donor receives a charitable receipt equal to the cash amount actually received by the charity when the shares are sold. This is equivalent to the fair market value of the shares on the date the shares are donated and subsequently sold to the third party. The amount will generally be at a discount to the trading price of the flow-through shares, as the third-party buyer will assume the hold period risk and this is reflected in the price paid for the shares. The gifting arrangement is organized and promoted by a taxable Canadian corporation (the "Corporation").

From the point of view of the donor, the combination of the CEE deduction as well as the elimination of capital gains on the donated shares (whose cost base is nil) reduces the after-tax cost of donating dramatically. The charity, on the other hand, is not constrained by liquidity issues or valuation risk. The flow-through shares are sold immediately upon donation by the donor. As consideration for having arranged the series of transactions, the charities will pay a fee to the Corporation for its services as organizer and promoter of the gifting arrangement equal to a percentage of the donated flowthrough shares sold to the third-party buyer.

In order to ensure the desired tax treatment described above applied to the gifting arrangement, a tax ruling was obtained. The tax ruling provided that:

  • The arrangement will constitute a "gifting arrangement" and a tax shelter pursuant to subsection 237.1(1) of the Income Tax Act (Canada) (the "Act").3
  • The donation of the shares to a charity will not prohibit the donor from deducting any CEE renounced on the shares, prior to the donation.
  • An amount equal to the fair market value on the date the flow-through shares are donated by each individual donor to the donor's respective charity will qualify as a gift for the purposes of "total charitable gifts".
  • An amount equal to the fair market value on the date the flow-through shares are donated by each corporate donor to its respective charity will qualify as a gift.
  • Provided the flow-through shares are capital property to the donor, no portion of the capital gain arising from the disposition of the shares, if any, resulting from the making of the gift to the charity will be included in computing the donor's capital gain.
  • If the shares are considered capital property to a donor, this will not change simply by virtue of the participation by the donor in the gifting arrangement.
  • In respect of proposed Bill C-10, it was the opinion of CRA that any CEE renounced to the donors pursuant to the flow-through share financing will not constitute an "advantage" for the purposes of proposed subsection 248(32) the Act.4

As it is not the CRA's practice to give rulings on questions of fact, the CRA did not give a ruling on the fair market value of the flow-through shares at the time they are donated and immediately sold to the third-party buyer.

Potential donors of CEE eligible shares should consult with their tax advisors to evaluate the tax advantages of gifting arrangements such as the one described in this article.


1 A gifting arrangement is essentially any arrangement in which statements or representations are made that make it reasonable to assume that a participant will make a gift of property acquired under the arrangement.

2 A gift or donation of the shares does not constitute a "trade" for purposes of the Securities Act.

3 The Corporation applied for and received a tax shelter number. The registration did not specifically refer to any particular purchase and donation, but applied generically to the transactions and involvement of the Corporation in the gifting arrangement.

4 For purposes of the proposed rules, the amount of a charitable gift will be reduced by the amount of the "advantage" received and will still be considered a charitable gift, so long as the value of the "advantage" does not exceed more than 80% of the value of the gift.

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