Tax Considerations When Donating Shares In Canada

Co-authored by Summer Law Students Abdullah Khalid and Amber LeBlanc

Canadian donors can gift publicly traded and privately held shares to qualified donees ("QD") that may be eligible for donation tax credits and other tax advantages. Subsection 149.1(1) of the Income Tax Act ("ITA") includes Canadian registered charities in its definition of QDs. The Canada Revenue Agency ("CRA") provides a list of QDs here.

The type of security donated can significantly impact tax treatment. For example, donating securities directly—rather than selling and donating the proceeds—may help donors mitigate potential capital gains tax, resulting in a greater overall tax benefit.

While it is possible for public and private corporation shares to be donated to QDs, gifting publicly traded shares is usually a more straightforward process, as gifts of privately held shares are subject to certain limiting criteria.

Before explaining the tax considerations for both public and private gifts of shares, it is important to note that QDs in Canada are not obligated to accept every gift offered to them. If a QD does choose to accept a gift of securities, it must determine the appropriate value for issuing a donation receipt.

Accordingly, potential donors interested in gifting securities to a QD should engage with the QD as early as possible to determine if the QD can and will accept the gift, the timing of the donation, whether a tax receipt will be issued and the value of the receipt.

Donations of public securities

A gift of public securities to a QD occurs where the gift is a share, debt obligation or right listed on a designated stock exchange, which can be verified by public records.

Process of donating

Once the QD and donor agree to the terms for the gift of public securities, the transfer of securities is generally a simple process which is done through the execution of a securities transfer form.

It is recommended that QDs and donors consider executing a gift agreement in advance of transferring the public securities to ensure that the parties agree to the critical terms of the gift. These terms may include what the gift is intended to be used for, as well as naming or recognition rights. QDs and donors should obtain professional legal advice for gift agreements.

Tax considerations

Donating public securities through this process limits donors from paying tax on any capital gain that has accrued on the shares they are donating.¹

To illustrate, when a person disposes of a share, any increase in value of that share is a capital gain.

• This means that if an individual or corporation buys a share for $100 and then later sells it for $1,000, they would incur a capital gain of $900.
• Only a portion of that capital gain is included in a taxpayer's taxable income; this is also called an "inclusion rate" and is 50% or 66.7% depending on the taxpayer's situation.
• For a person who has an inclusion rate of 50%, $450 of the capital gain would be subject to tax.

However, when donors gift a publicly traded share to a QD, their inclusion rate drops to zero, meaning they don't pay tax on the capital gain. This special tax treatment benefits both donors and QD's, making it a powerful and efficient way to maximize charitable impact while minimizing tax liability.

Donations of private securities

Donating private securities is more complex. By default, private corporation shares are "non-qualifying securities" ("NQS"). When a NQS is gifted to a QD, the donor can only issue an official donation receipt under specific circumstances that are outlined below.

Process of donating

The issuance of a charitable receipt for the donation of NQS depends on whether it qualifies as an excepted gift. The criteria to be considered an excepted gift is as follows:

• The gift is a share.
• The QD is not a private foundation.
• The donor deals at arm's length with the QD and each of its directors, trustees, officers and like officials.

Further, NQS will lose its status, if within 60 months of acquiring the NQS, one of the following two conditions applies:

1. The security ceases to be a NQS because the privately held corporation becomes a public corporation.
2. The QD disposes of the NQS.

The gift is considered to have been made at the time the property ceased to be a NQS or when it is disposed of by the QD. If a QD disposes of the NQS within 60 months of receiving it, the fair market value is the lesser of its value at the time of the gift or its value at the time of disposition. If the share ceases to be a NQS within 60 months after the gift, the fair market value is the lesser of its value at the time of the gift or its value when it stops being an NQS.

The amount of the donation receipt for the NQS will depend on the fair market value of the shares. Therefore, the valuation of the private securities and timing of the valuation is a unique and live issue in the context of gifts of private securities.

Additional considerations

There are some additional considerations that may affect a gift of shares that go beyond the scope of this article.

For example, certain types of shares, such as qualified small business corporation shares, are treated differently than other securities. For these specific shares, a donor may be able to offset all capital gains with the lifetime capital gains exemption.

As such, Canadian taxpayers interested in considering making any gifts of shares to QDs should seek appropriate professional advice to maximize their tax benefit and charitable impact.

Footnote

Read the original article on GowlingWLG.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.