11 the tax credits generated from the dona- tion would offset the tax owing on the income earned, so no tax would be pay- able on the money earned and then donated. At lower income brackets, and in Alberta, the credits would actually be more than offset by the tax owing and the donor would be able to shelter other income from tax with the credits earned from this donation. If the donor is donating cash that is not income to them in the year donating, the credit could be used to offset taxes owing from other sources. But, in those provinces where the tax rate is higher than the credit rate on donations, the donor could still be paying tax on a dollar given to charity! PUBLIC SECURITIES Canada levies tax on the appreciation in value of a capital good. The tax is levied when the item is disposed of (i.e. sold, given away, or donated). However, the ITA does contain an exemption for publicly listed securities (on certain exchanges) donated to chari- ty. Moreover, the donor continues to receive a donation tax receipt equal to the fair market value of the shares donated. Thus, there is no tax on the donation, but the donor still receives a tax credit equal to the fair market value of the donation. While shares of publicly traded corpora- tions are the most popular form of secu- rity to be donated to charity, there are a variety of other sophisticated financial securities that may also be donated. Examples include exchange-traded funds, index funds, hedge funds, war- rants, rights, and put and call options. If these products qualify as publicly traded securities, they will qualify for the spe- cial tax treatment accorded donations of this type. Example: Assume that Kirk lives in Ontario and buys one share of a high-tech company for one dollar ($1). Over time, the share rises in value and may even split once or more than once. After ten years, with all splits factored in, Kirk owns shares worth a total of $100. If Kirk were to sell the share, he would have a capital gain of $99 (i.e. the fair market value of $100, less the cost of $1). Applying a capital gains inclusion rate of 50% only $47.50 would be taxable. Further apply- ing a tax rate of 46%, the amount of tax payable would be $21.85. Thus, if Kirk sells the shares, he is left with after-tax income of $78.15 (i.e. $100 - $21.85). Conversely, let’s say Kirk decides he wants to donate his shares instead of selling them. In this case, Kirk has no tax to pay and, of course, receives no income from the sale of the share. He does however receive a tax receipt for $100, which (ignoring the lower credit rate for the first $200) will offset $46 of taxes due from other sources. So, assuming Kirk is paying tax on income from other sources, the actual after-tax cost of this donation is $54. FLOW-THROUGH SHARES For income tax purposes, the cost of a flow-through share is deemed to be zero. So, even if the buyer buys the share at $10.00 and sells it at $8.00, the share is still assumed to have gained $8.00 in value and is therefore taxed on an $8.00 capital gain even though it actually lost $2.00. (Don’t worry about the shareholder though; ownership of the share gave them access to a deduc- tion making it worthwhile). Flow- through shares are like any other asset and can be donated to charity. When these shares are publicly traded, there is no tax on the capital gain. However, for purposes of donation, the law considers the amount of the purchase price to be a capital gain and only the amount in excess of that (if there is any) to be eligi- ble for the capital gains exemption. STOCK OPTIONS The taxation of stock options can be complicated and is based on the nature of the corporation granting them, and what happens to the option then. So extreme care must be ‘exercised’ when donating options. However, at a funda- mental level, an employee who exercises a stock option (i.e. buys it at less than fair market value) receives a benefit equal to the difference between the pur- chase price (and any amounts they may have paid for the option) and the fair market value of the share at the time the option is exercised. Tax is calculated based on the amount of this benefit which is added into income. Depending on overall income and capital gains, the employee may be able to claim a deduc- tion against the stock option benefit depending on the nature of the corpora- tion and the exercise of the option. If an employee stock option is exercised and marketable securities are donated within 30 days after the option is exercised, and if certain other conditions are met, only 25% of the benefit is taxable. If the shares are traded on a public exchange, then their donation is treated as the donation of other publicly listed shares as described previously. PRIVATE SECURITIES The donation of securities of private cor- porations is dealt with in one of two ways; either the gifts are “excepted” or they are not. An excepted gift is a share donated to a charitable organization or public foundation where the donor deals at arm’s length with the charity’s directors/trustees, officers and other like officials. In these circumstances the gift is treated as any other gift of capital in which there is no special tax treatment for the donation (i.e. the donor pays tax on the disposition). In cases where the gift has been donated to a private foundation or to a public charity to which the donor is related, the gift is not considered “made” until one of two things happen: either the item donated must cease to be a non-qualifying security (e.g. the corpo- ration is no longer controlled by the donor or the corporation becomes pub- licly listed) or the charity has disposed of the security within five years of receiving the donation. The fair market value of the gift is then the lesser of: • the value of the security when trans- ferred to the charity, • and the value of the security when the gift is deemed to have been made. Note that the donor does not have to include any capital gain in their income before the shares are sold by the charity, so that the donor is not paying tax in advance of receiving the receipt. If the
