Death and Taxes May Be Inevitable, But Does It Have To Be So Complicated?
by Adam Aptowitzer
We have written before (several times in fact) of the great untapped potential in the donation of shares of private companies to charity. That there is great value in private companies is evident in their title as the engine of our economy. And the opportunity for capitalizing (if you’ll pardon the tax pun) on these assets lies with the turnover of assets that is occurring as the baby boomer generation prepares their affairs for the next generation.
Private company shares are a type of Non Qualified Security (NQS) under the Income Tax Act. From a tax perspective, donations of NQS are somewhat more complicated than the donations of publicly traded shares. That this should be true should not surprise anyone given that the donation of private shares often raises questions of valuation, corporate control and liquidity. For example, an individual may arrange for a donation of an ostensibly massive donation of private company shares but if the shares cannot be sold on the open market then it may be close to impossible to find an appropriate buyer – who is prepared to pay the valuation price. In the circumstance, a large donation receipt has been issued but the charity has not been able to access the value.
One of the ways the Act tries to manage the various problems is to require the donor to recognize the capital gain (i.e. the tax consequences) that comes with a donation at the time at which the donation is made but the credits which would offset the tax credits are not available unless the charity sells the NQS (or they otherwise cease to be NQS) within 5 years of the donation. The trick then for many donors and charities is to orchestrate a sale of the securities within the same year as the donation.
However, for gifts that take place by will that can be more difficult. Unless the donor is aware of his or her impending death – and the prospective purchaser is waiting in the wings – planning for the donation and subsequent purchase of NQS would be impossible.
The workings of the law also create some uncertainty in the giving of NQS by will. Most readers will be aware that on death there is a deemed disposition of all capital assets owned at that time. If there has been a net increase in the value of the capital assets there will be tax owing. On the other hand, this tax can be offset if gifts are made to charity in the individual’s will (another important reason to have a will). So the question arises, if the donation of NQS can be made by will to offset the deemed disposition on death, but the receipt for the NQS is only available upon the sale of the NQS – and even then only if done within 5 years – how does the donation of NQS by will affect the deemed disposition on death?
A recent CRA View publication attempts to answer the question by stating that a separate provision which allows a donor to report a lower amount for tax purposes would be appropriate here. Essentially, this would allow the executor to report a lower value of the shares (as low as the Adjusted Cost Base for those particular shares) for purposes of calculating the tax owing on the deemed disposition of those shares.
This would have the net effect of reducing – potentially to zero – the amount of tax payable on the NQS at the time of death. On the other hand, should the shares be sold by the charity within five years of the gift the receipt it could then issue would be of no use to the estate (unless it remains open to the estate to refile the individual’s terminal year return).
Fundamentally, the lesson to learn here is that while there are barriers to accessing the tremendous value in NQS they can be passed where there are donors of goodwill (and people who know the rules!).
 CRA Views 2013-0486701E5: Gift by will of a non-qualifying security