shares of a corporation with which you do not deal at
arm's length, unless the shares are listed on a designated stock
exchange
obligations or another security issued by yourself, other than those
listed on a designated stock exchange and deposits with financial
institutions.
A donation or gift is an excepted gift if:
the security is a share
the donee is not a private foundation
the taxpayer deals at arm's length with the donee,
and
where the donee is a charitable organization or
public foundation, the taxpayer deals at arm's length with each
director, trustee, officer and like official of the donee.
For instance, this reserve would apply when the owner of
a private company donated shares of the company, perhaps preferred shares,
to a private charitable foundation, with which they do not deal at arm's
length.
A reserve can be claimed for 100% of the capital gain resulting
from the donation of a non-qualifying security, other than an excepted gift, to a qualified donee (see the
CRA
definition for a qualified donee). The reserve can be claimed for
each tax year ending within 60 months of the time the security was
donated. However, the reserve cannot be claimed if, before the end of
the tax year
the donee disposes of the security, or
the security ceases to be a non-qualifying security.
If this happens, the donation can be claimed as a
deduction (corporate) or for a tax credit (individual) for the year.
The reserve allows the donor to defer the income
inclusion from the donation (any resulting income or capital gain) until the year in
which a tax credit or deduction can be claimed for the donation.
If the security is not disposed of during the 60 month
period, the reserve is not required to be added back to income after the end
of the period. The result is that the capital gain is not included in
income, but there is no donation tax credit or deduction allowed.
Assume an Ontario taxpayer has made a donation of
non-qualifying securities with a fair market value (FMV) of $60,000 and
adjusted cost base (ACB) of $40,000, resulting in a capital gain of
$20,000. The taxpayer has donated the securities to a qualified donee
in year 1. The taxpayer has a marginal tax rate of 46.41%.
The donation tax credit rates are:
First $200 - 15% Federal, and 6.05% Ontario = total
21.05%
Amount over $200 - 29% Federal, and 11.16% Ontario =
total 40.16%
Tax results:
taxes on the taxable capital gain of $10,000 (1/2 x
$20,000) = $4,641
donation tax credit (if the donee disposes of the
securities within 60 months of the donation) will be $24,057.78 (21.05%
x $200 + 40.16% x $59,800)
We will show what happens in 3 different situations:
The donee disposes of the securities in year 1
The donee disposes of the securities in year 3
The donee does not dispose of the securities within
60 months of the time the security was donated.
i. Donee disposes of the securities in year 1
The taxpayer cannot claim a reserve, so will have a
capital gain of $20,000. However, the taxpayer can claim the
donations tax credit.
ii. Donee disposes of the securities in year 3
The taxpayer can claim a reserve of $20,000 in years 1
and 2, in order to avoid tax on the capital gain. In year 3 the
reserve is added back to income, and the taxpayer will pay tax on the
capital gain of $20,000. The donations tax credit can be claimed in
year 3.
iii. Donee does not dispose of the securities
within 60 months of the time the security was donated.
The taxpayer can claim a reserve of $20,000 in each of
years 1 to 5, avoiding any tax on the capital gain. The reserve is
not required to be added back to income in year 6, so no tax is ever paid
on the capital gain. However, the donations tax credit can never be
claimed.
A taxpayer can elect to designate proceeds of disposition
of an amount between adjusted cost base
and fair market value, thereby reducing or eliminating
the capital gain on the gifted property. This can be done when the
property is gifted, or, in the case of non-qualifying securities, when the
securities are disposed of by the donee. If it is known in advance
that the donee will not dispose of the securities within 5 years, this
election can be used when the gift is made, to avoid having to claim a
reserve.
Tax Tip: This can be useful to owners
of private companies, but make sure you get professional advice because it
is complicated.
The information on this site is not intended to be a
substitute for professional advice. Each person's situation differs, and
a professional advisor can assist you in using the information on this web
site to your best advantage.
See our Business
Directory for tax, accounting and finance-related firms in your
area.
Please see our legal
disclaimer.
