Donation of Appreciated Shares by a Corporation
by Arthur Drache, C.M. Q.C.
We were recently asked what the impact of the 1996 budget changes relating to charities had upon corporate donors, and in particular, on private holding companies. Basically, the same proposals apply as they would to individuals with the obvious exception that corporations don’t legally die and thus in no year will there be the 100% of income limitation on the gift. Of course, corporation gets a deduction for charitable donations rather than a tax credit.
In a nutshell, the rules are as follow:
· as with an individual, when the corporation donates its shares to a charity, there will be a deemed realization at fair market value
· the corporation can claim up to 50% of its annual income as a charitable donation. It does not make any difference whether this income is from business, interest or dividends.
· the corporation can add to that amount 50% of the taxable capital gain (that is, 75% of the whole gain) realized on a donation to a registered charity.
· the corporation has a five-year carry forward of any excess which it claims.
In the case of a private corporation, one other factor should be kept in mind. The tax free portion of the net capital gains (ie., 25% of those net gains) goes into the capital dividend account. This is a notional account created by the Income Tax Act, out of which tax-free dividends can be paid to shareholders.
Let’s look at an example. Suppose a private company earns $100,000 a year and it holds a portfolio. That portfolio includes Consolidated Moose Pasture shares which cost the company $40,000 and are now worth $100,000. The president and sole shareholder of the company proposes to donate the shares to a registered charity. The calculation looks like this.
Basic income $100,000
taxable capital gains $45,000*
Income $145,000
Deduction: 50% of income $72,500
plus
50% of taxable capital gain $22,500
Maximum deduction in year $95,000
* 75% of ($100,000 – $40,000) = $45,000
Thus almost all the $100,000, gift is deductible in the year in this example with a mere $5,000 being carried forward.
But the shareholders get an added bonus because the non-taxable art of the capital gain, $15,000 is assigned to the capital dividend account and can be used to pay tax-free dividends.
It is worth noting that if the capital gain is larger, you get potentially better results. Suppose that the cost of the shares was $20,000 instead of $40,000. The figures then look like this.
Basic income $100,000
taxable capital gains $60,000*
Income $160,000
Deduction: 50% of income $80,000
plus
50% of taxable capital gain $30,000
maximum deduction in year $110,000
* 75% of ($100,000 – $20,000) = $60,000
In this instance, the full $100,000 can be claimed in the year and there will be $20,000 in the capital dividend account which can be distributed tax-free to the shareholders in the future.
We trust these examples will be useful to those who are working with potential donors who hold appreciated assets in a holding company are considering a major donation of such shares.