Gwenyth Stadig, Natasha Barrett, Upama Poudyal, Abdullah Khalid, Amber LeBlanc all of Gowling WLG (Canada) LLP

Canadian donors can donate a variety of types of property to “qualified donees” which gift can be eligible for donation tax credits. Subsection 149.1(1) of the Income Tax Act (“ITA”) defines the term “qualified donee” (“QD”) to include Canadian registered charities. The Canada Revenue Agency (“CRA”) maintains a list of QDs here.

The nature of a gift may also affect the tax impact of the gift.  For example by donating securities directly, rather than selling and donating the proceeds, donors can mitigate potential capital gains tax and may therefore obtain a larger tax benefit through the gift.

While it is possible for public and private corporation shares to be donated to QDs gifting publicly traded shares is usually a more straightforward process as gifts of privately held shares to QDs may be subject to certain limiting criteria.

Notably, QDs in Canada can choose to accept – or not accept – any gift which is offered. Furthermore, if a QD accepts a gift from a Canadian taxpayer the QD will need to determine the value that it can issue a donation tax receipt for. It is accordingly important that any potential donors interested in gifting securities to a QD should engage with the QD as soon as possible to determine if the QD is able and willing to accept the gift, when the QD will receive the gift, if the QD will issue a donation receipt, and what the value of the receipt will be.

Donations of Public Securities

A gift of public securities to a QD occurs where the gift is a share, debt obligation, or right listed on a designated stock exchange, which can be verified by public records.

Process of Donating

Once the QD and donor agree to the terms for the gift of public securities the transfer of securities themselves is generally a simple process which is done through the execution of a securities transfer form. This said, it is recommended for QDs and donors to consider executing a gift agreement in advance of transferring the public securities to ensure that the parties agree to critical terms of the gift. These terms may include what the gift is intended to be used for, as well as naming or recognition rights. QDs and donors should be obtaining professional advice for gift agreements.

Tax Considerations

Donating public securities through this process may have the added benefit of reducing the amount of tax payable by the donors on any capital gain that has accrued on the shares they are donating.[1]

To illustrate, when a person disposes of a share, any increase in value of that share is a capital gain. This means that if an individual or corporation buys a share for $100 and then later sells it for $1,000, they would incur a capital gain of $900. Only a portion of that capital gain is included in a taxpayer’s taxable income; this is also called an “inclusion rate” and is 50% or 66.7% depending on the taxpayer’s situation. For a person who has an inclusion rate of 50%, $450 of the capital gain would be subject to tax.

However, when donors gift a publicly traded share to a QD, their inclusion rate drops to zero, meaning they don’t pay tax on the capital gain. This special tax treatment benefits both donors and QD’s, making it a powerful and efficient way to maximize charitable impact while minimizing tax liability.

Donations of Private Securities

Donating private securities is more complex. By default, private corporation shares are “non-qualifying securities” (“NQS”). When a non-qualifying security is gifted to a QD, the QD can only issue an official donation receipt under specific circumstances that are outlined below.

Process of Donating

The issuance of a charitable receipt for the donation of NQS depends on whether it qualifies as an excepted gift. The criteria to be considered an excepted gift is as follows:

• The gift is a share;
• The QD is not a private foundation; and
• The donor deals at arm’s length with the QD and each of its directors, trustees, officers, and like officials.

Alternative an private security can lose its NQS status , if  within 60 months of the QD acquiring the NQS, one of the following two conditions applies:

• The security ceases to be a NQS because the privately held corporation becomes a public corporation, or
• The QD disposes of the NQS.

In such a situation, the gift is considered to have been made by the Donor to the QD at the time the property ceased to be a NQS or when it is disposed of by the QD. If a QD disposes of the NQS within 60 months of receiving it, the fair market value is the lesser of its value at the time of the gift or its value at the time of disposition. If the share ceases to be a NQS within 60 months after the gift, the fair market value is the lesser of its value at the time of the gift or its value when it stops being an NQS.

The amount of the donation receipt for the NQS will depend on the fair market value of the shares. Therefore, the valuation of the private securities and timing of the valuation is a unique and live issue in the context of gifts of private securities.

Generally, Canadian taxpayers interested considering making any gifts of shares to QDs should seek appropriate professional advice to maximize their tax benefit and charitable impact.

[1] Under s.110.1 of the ITA for corporations, and s.118.1(3) for individuals.