In a surprise step, the Federal Government has proposed to limit the availability of the exemption from tax on capital gains where the donated shares are shares acquired pursuant to a flow-share agreement on or after Budget day. The limitation will be that the exemption from tax on the capital gain will only apply to the extent that the cumulative capital gains in respect to the gift or disposition of the shares exceeds the original cost of the flow-through shares.
It is rare for the value of the flow-through shares gifted to be in excess of the original cost. This may therefore practically shut down the use of flow-through shares in these gifting arrangements in most provinces. The following is an example of the tax consequences of the donation of publicly listed flow-through shares under the current rules:
Price paid for flow-through share (20% premium) = $120.00
Value of flow-through share deductions (fed/prov) = ($55.70)
Net value of flow-through share tax credits (fed/prov) = ($12.90)
Capital gains tax on disposition of shares (fed/prov) = $0.00
Value of charitable donation credit (fed/prov) = ($46.40)
Subtotal = ($115.00)
Net after-tax cost = $5.00
Donation amount = $100.00
Government tax support as % of donation = 95%
The Government has apparently decided that the extent of tax support the Income Tax Act permits for such donations is excessive and has therefore decided to limit the availability of the benefit to the portion of the capital gain realized that is in excess of the amount paid by the donor for the flow-through share prior to the deduction of any expenses which can be renounced on the flow-through shares. This is a significant change which will mean the benefit of flow-through share gifts will no longer be available to taxpayers and charities. The Budget proposals also contain anti-avoidance provisions that are intended to ensure taxpayers are not able to structure around these changes.