The Giving Spirit Meets the Tax Advisor
Adam Aptowitzer, December 04, 2006
This is the time of year where parents spend time with their children, co-workers revel in collegiality, retailers rejoice with their profits, and taxpayers look to generate tax deductions and credits. This year may be particularly beneficial for individuals in the latter category because of the unique opportunity afforded donors in the Conservative government’s tax changes announced in the May 2006 budget. The most prominent of the changes allowed for the donation of shares in public companies to public charities (i.e. all but private foundations) on a tax free basis.
Last year at this time, if one were to donate shares with a capital gain of $100 and a fair market value of $110, the gift would create a tax liability of $11.50 (assuming a combined tax rate of 46%) and a donation tax credit of $46 for a net value of $34.50. This year, the same donation would result in no tax liability and so have a net value of $46 to the donor.
Not only does the change in the law increase the value of the donation to the donor but it also gives the donor other tax planning opportunities. For example, consider a situation where the donor holds shares which are being held for a long term investment with a large accrued capital gain. The donor also has cash on hand of $10,000. The changes to Act allow the donor to donate $10,000 worth of shares with no tax liability and repurchase the shares with the cash. Not only does the donor have a tax credit but he also has a bump up in the cost base of the new shares.
Another interesting option exists for holders of flow through shares. Flow through shares are issued by mining companies and essentially allow the holder to deduct the cost of certain exploration expenses; on the flip side the Act deems the cost of the shares to be zero so that when sold the full fair market value of the share is a taxable capital gain. Thus when a publicly traded flow through share is donated to a public charity the donor receives a tax credit for the full value of the share as opposed to a taxable capital gain on the full value if he were to sell it.
Of course, there are other opportunities as well for year-end tax planning involving the donation of gifts in kind. In this regard there are two different categories of donations. The first is the donation of land or items around your home or office which might be of actual value and interest to charities. Items which are certified Canadian cultural property or environmental property and donated to the appropriate charities may result in favourable treatment (see here for another article on the subject). The second method involves participation in one of the various donation tax shelters which are very active this time of year. These plans are often the target of CRA investigations and should be used only by the stout of heart able to withstand CRA scrutiny and even then only with the advice of an experienced tax professional.
Another way to take advantage of year end tax credits would be to make a donation to one of the political parties, which in some ways has some advantages over charitable donations. However, this may be the last year that donations to political parties are a useful tax planning tool as the new Federal Accountability Act will severely limit the amounts of donations by individual taxpayers. Regardless of which charity or political party you choose to donate to please accept my wishes for a safe and happy holiday season and a prosperous new year.