Avoid Capital Gains by Donating Shares or Other Capital Property

When capital property is donated, there is a disposition for tax purposes, which may result in a capital gain.  The fair market value (FMV) of the property donated is used as the proceeds of disposition, and as the amount of the donation.  In some circumstances it may be helpful to designate the proceeds amount to be an amount less than FMV.  See our article on the election for designating the proceeds of donated property.

If any “advantage” was received (compensation or other benefits) in return for the donation (e.g., tickets, meals), the eligible gift for purposes of the donation claim is the proceeds of disposition less the advantage received.

Another benefit of donating capital property is that your total donations limit will be increased by 25% of the taxable capital gain on gifts donated, up to a maximum total limit of 100% of net income.  See the Canada Revenue Agency (CRA) topic “calculating your increased donations limit” in the publication P113 Gifts and Income Tax.

Capital gains can be eliminated by donating certain types of capital property (qualified investments, prescribed debt obligations, or ecologically sensitive land) to qualified donees (see the CRA definition for a qualified donee).  The taxable capital gain is eliminated for this type of donation made after May 1, 2006.  For donations of this type of property made before May 2, 2006, the taxable capital gain was 25% instead of 50%.

It can be very difficult, if not impossible, for securities to be transferred in the last week of December.  Trying to do so risks the possibility that the donation receipt will be dated in the following year.  A donation of mutual funds can take several months, because the recipient of the donated securities must set up an account with the particular mutual fund involved.  The recipient may require approval from their board of directors to set up an account, so timing will depend on how often the board meets.

Donations of Private Corporation Shares and Real Estate

The Federal 2015 Budget proposes to provide an exemption from capital gains tax for certain dispositions of private corporation shares and real estate which occur after 2016.  This measure was not included in Bill C-59, which received Royal Assent on June 23, 2015.  The exemption will be available where:

cash proceeds from the disposition of the private corporation shares or real estate are donated to a qualified donee within 30 days after the disposition; and the private corporation shares or real estate are sold to a purchaser that is dealing at arm’s length with both the donor and the qualified donee to which cash proceeds are donated.

If only a portion of the proceeds of disposition are donated, the exempt portion of the capital gain will be calculated as capital gain x cash proceeds donated divided by total proceeds of disposition.

See Donations of Private Corporation Shares and Real Estate on the Budget 2015 website.

CRA has the following information on their site regarding donating capital property:

P113 Gifts and Income Tax T4037 Capital gains guide – Calculating your capital gain or loss Form T1170 Capital gains on gifts of certain taxable property