By: Adam Aptowitzer
The tax proposals currently the subject of much public discussion have more or less bypassed the charities sector. Indeed, the changes will not directly affect the regulation of donations or the charities themselves. However, indirectly, the reduction of taxable income in the hands of Canadians will undoubtedly lead to a reduction in donations across the board. Nevertheless, the situation presents a golden (literally) opportunity for charities.
The proposed tax changes focus on the structure of private corporations, in particular, how the shares are held, how dividends are paid, and how the benefits of holding these shares are often multiplied amongst family members. It should be recognized that the Income Tax Act (Canada) currently allows for the donation of privately held securities (in the Income Tax Act they are called, along with other things, “non-qualifying securities”). However, on donation, the capital appreciation on these shares is taxed.
In the case of a small family business, the shares may have been held over the past 30 or 40 years by the parents, who have amassed significant value in the corporation. This value would be reflected in the appreciation of shares. If these parents were philanthropically inclined, they may wish to donate the shares to a charity. Under the current rules, assuming that the donation took place through an arm’s length charity while the individuals were alive, the resulting donation tax credit would offset the taxes owing, by an amount slightly less than double (depending on the Province). This means that the couple would have additional tax credits to offset their taxes from other sources.
If the same couple wishes to donate shares of a publicly traded corporation, there would be no tax on the appreciation in value and the entirety of the donation tax credits would be available to offset taxes owing from other sources.
Philosophically, there is no distinction to be made between the shares of a publicly held company and one that is privately held. In the context of the current proposals, where one of the Government arguments is that it is trying to level the playing field among workers, one would imagine the levelling the playing field between publicly traded securities and privately traded securities would be a direct extension of the Government’s logic.
It is publicly known that there is an enormous amount of wealth held by Baby Boomers in the shares of their businesses. (And just because a business is private does not necessarily make it small). Incentivizing the donation of these shares would be a boon to the entire charitable sector. Moreover, given the controversy created by the proposals now would be the perfect time for the Government to sweeten the pot by extending favourable tax treatment to the donation of privately held shares.
Indeed, making this change would not only help provide logical consistency within the Income Tax Act but it would serve to mitigate the losses which would be incurred by charities due to the additional taxation of those most likely to donate.
While the charitable sector is hobbled by the political activities rules in advocating for such change, an avenue for appropriate suggestions by charities exists in the form of advising ones MP and Senator of this option.
It should be said that the author just published a paper with C.D. Howe Institute, outlining these suggestions from a technical perspective. A link to that paper is here.