Donate your worthless stocks to charity and get tax credits
June 27, 2008
Is this another complex financial instrument that will help the wealthiest investors pay fewer taxes while making charities believe they actually have received more funds? Imagine the worthless stocks from oil company cash flows when the exploration comes up empty. Imagine Calgarians contributing these stocks to their favourite charity.
“The resource mining industry in Canada has been given special treatment under Canadian tax law to make it easier for the industry to raise capital — by issuing flow-through shares to investors. If you invest in flow-through shares, the company enters into an agreement with you to incur Canadian exploration expenses (CEE) or Canadian development expenses (CDE) in an amount equal to the cash you paid for the shares. The company also agrees to renounce and flow through to you the expenses incurred, so the CEE and CDE expenses are deemed to be your expenses, not the company’s. The result? You’re able to claim a deduction for the full amount of the money invested, with most of the deduction (often about 90 per cent) falling in the year you make the investment, and the balance being deductible in the second and third year. For tax purposes, your flow-through shares will generally have an adjusted cost base of zero. By now, you may be aware that the federal budget of May 2 changed the tax law to eliminate the capital gain on any publicly traded shares that you donate to a registered charity (excluding private foundations) after May 1, 2006. Because flow-through shares typically have a zero adjusted cost base (ACB), there will generally be a capital gain when you sell them. You can avoid tax on that gain, and help a charity at the same time, if you donate the shares. Check out the math; it’s quite amazing: Suppose you invest $10,000 in flow-through shares. You’ll save approximately $4,600 in taxes from the $10,000 deduction you’ll be entitled to (assuming a marginal tax rate of 46 per cent). If you donate those shares to charity after two or three years, when the development is completed, and we assume the shares are still worth $10,000, you’ll pay no tax on the capital gain (the gain results from your ACB being zero). You’ll also be entitled to a donation tax credit for the $10,000 value of the shares, which will save approximately $4,600 in tax. So, you paid $10,000 for the shares, got $4,600 back in tax savings from the deduction, and $4,600 from the donation tax credit, leaving a net out-of-pocket cost of just $800. That is, a $10,000 donation to charity cost you just $800. That’s what I call charitable arbitrage (Cestnick 2006-07-08).”
“It is important for charities to ensure that the receipts issued in respect of flow-through shares received are accurate. First, charities have the duty to exercise due diligence when issuing charitable donation receipts to ensure that the information on the receipts is accurate. Failure to issue receipts reflecting the accurate eligible amounts may lead to charities being exposed to intermediate sanctions that were proposed by the 2004 federal budget and implemented in 200516 for issuing incomplete receipts17 or false receipts,18 or may even lead to the revocation of their charitable status. In this regard, subsection 248 (41) provides that if a donor fails to provide the charity with relevant information19 that may cause the eligible amount of the gift to be less than the fair market value of the property gifted, then the eligible amount of the gift would be deemed to be nil. Second, a charity must be careful in ensuring that the eligible amount of a receipt reflects the accurate true value of the donation received in order not to negatively impact the ability of the charity to meet its disbursement quota. The amount for which the receipt is issued is included in the charity’s disbursement quota requirement for the following year. If a charity issued a receipt for an inflated amount and later sold the property for an amount far below the amount for which the receipt was issued, the charity may have a shortfall in meeting its disbursement quota. Failure to meet the disbursement quota is grounds for the revocation of a charity’s registered status.20 (Carters Professional Corporation 2007-06-12).”
Theresa L.M. Man; Karen J. Cooper; Terrance S. Carter. 2007-06-12. “Donation Tax Shelters Involving Flow-Through Shares”. Charity Law Bulletin. No. 116. June 12, 2007.
Cestnick, Tim. 2006-07-08. “Flow-through Mining Shares Can Produce Charitable Bonanza.” Globe and Mail.