October 23, 2006
As pointed out in RSM Richter’s Tax News dated May 16, 2006, the May 2, 2006 federal budget allows for the donation of publicly traded securities to a charity without realizing any taxable capital gains that would otherwise be realized at the time of the donation.1 The benefits of this budget proposal may be further enhanced if the donation of the publicly traded securities is made through a private corporation.2
Consider the following example. Mr. Bean acquires $100,000 of flow-through shares (“FTS”) personally. Such FTS are publicly traded shares. After Mr. Bean makes use of the flow-through deduction afforded to him, he transfers the FTS to his private corporation on a tax deferred basis.3 The private corporation then donates the FTS to a registered charity. If we assume that Mr. Bean and the private corporation are resident in Alberta and are subject to the highest personal income tax rate, and highest corporate tax rate for income not eligible for the small business deduction respectively, the following will result upon the donation of the FTS to a charity (assuming that the flow-through shares have a similar fair market value of $100,000 at the time of donation):4
|
|
Personal |
Corporate |
Total |
|
Cost of FTS acquired |
$ 100,000 |
|
$ 100,000 |
|
Tax savings on FTS deductions |
$ (39,000) |
$ n/a |
$ (39,000) |
|
Tax on transfer of FTS to private co. |
$ - |
$ - |
$ - |
|
Tax savings on donation of shares by private co. |
n/a |
$ 32,500 |
$ (32,500) |
|
Amount added to private co’s Capital |
|
|
|
|
Dividend Account (“CDA”) - $100,0005 |
|
|
|
|
Personal tax savings on receipt of CDA |
$ 24,500 |
|
$ (24,500) |
|
After-tax cost of donation |
|
|
$ 4,000 |
As calculated in our May 16, 2006 Tax News, if Mr. Bean donated the FTS personally, the total after-tax cost of the donation would be $19,250. As illustrated above, a donation of FTS made through a private corporation will lower the after tax cost of the donation of FTS significantly assuming that there are available assets in the corporation to extract from the CDA.
Accordingly, donors should be aware of the significance of the new budget proposals, and the possible planning that can be accommodated. The tax professionals at RSM Richter would be pleased to discuss planning with you to help meet your philanthropic objectives.
1. There is a deemed disposition when a donation is made. A capital gain is realized to the extent that the fair market value (“FMV”) exceeds the securities adjusted cost base (“ACB”). One of the federal budget proposals is to fully exempt from taxation any capital gains realized when gifted to a charity.
2. The draft legislation for the budget proposals do not currently preclude the example under consideration.
3. Tax deferred transfers of certain assets with a FMV in excess of ACB can be done if the provisions under subsection 85(1) of the Act are utilized.
4. Generally FTS's are traded at a premium on issuance, therefore at the time of donation, the FMV of the FTS may be a value other than its original cost.
5. The FTS have an ACB of nil therefore a capital gain of $100,000 is realized when the shares are donated by the corporation to charity. However, the May 2, 2006 federal budget proposals make such capital gain not taxable. Accordingly, the non-taxable portion of the capital gain - $100,000 - is added to the CDA which will enable a tax-free capital dividend of $100,000 to be paid to the shareholder.