Gifts of Privately Held Securities

Gifts (up to 75% of net revenue) may be made either by an operating or a holding company – the challenge is getting money out tax-effectively. Donations can often facilitate this.

Family businesses make up a great deal of wealth in Canada.  However, often that wealth is illiquid and therefore difficult for entrepreneurs to access.  Unlike publicly listed securities, gifts of private company shares do not enjoy the same favorable tax rules with regards to the tax on capital gains.  In addition, there are rather complex rules surrounding the donation of private company shares (A.K.A. non-qualifying securities) to charity including:

• The Excepted Gift rules which permit a tax receipt to be issued for a gift of non-qualifying securities provided that the donor is at arm’s length to the charity.

• In the absence of the gift qualifying under the Excepted Gift rules, the recipient charity cannot issue a tax receipt until the securities cease to be non-qualifying (e.g., the charity sells the securities).   Furthermore, a tax receipt cannot be issued at all if the securities remain non-qualifying for longer than five years after the date of the gift.  Remember, five years may seem like a long time, but it can be difficult sometimes to find a willing buyer for private company shares.

• Thanks to a special reserve mechanism, the capital gain (if any) incurred at the time the non-qualifying security is gifted to the charity can be deferred for up to five years.

How public foundations (like Benefaction) can assist

A gift is a non-qualifying security when the donor is not at arm’s length with the issuer of the shares (the company).    Therefore, a tax receipt can only be issued when one of the following occurs:  the security ceases to be non-qualifying because either the arm’s length relationship to the issuer is broken (e.g., the charity sells (monetizes) the security), OR as in this example, if the security is a share.  If the security is a share, a tax receipt can be issued once the donor is at arm’s length with every officer, trustee, director or like official of the recipient public charity.  In all three cases, there is a 60-month time frame from the date of the gift to accomplish the task.  In all cases, the eligible amount equals the lesser of the original FMV on the date of the gift and the FMV or proceeds received at the later date.

SPECIAL NOTE: the excepted gift rules only work with public charities and not with private foundations.

This article has been revised by Benefaction with permission from the author, DeWayne Osborn of Cardinal Capital Management, Inc. in Winnipeg.

To learn more about Donations of Preferred Shares from Private Corporations (CCPC) check out our PDF Guide of this topic: Donation of Preferred Shares from Private Corporations (CCPC).