This is the time of year that high net worth clients are looking for one more tax saving opportunity before year end. Donations of flow-through shares, commonly available from corporations in the oil & gas, mining and renewable energy sectors, will still be allowed. However, many tax and financial advisors will want to brush up on their knowledge of the subject first.
Recall that under these arrangements, eligible exploration, development and project start-up expenses may be renounced by the corporation and flowed through to investors, who deduct them on their tax returns. These flow through shares were at one time, deemed to have a cost base of zero, with the result that on later disposition, a capital gain (or loss) is calculated on the full amount of the proceeds.
When publicly listed flow-through shares are then donated to charity, they qualify for relief from capital gains tax. In total then, these investors benefitted from:
- the deduction for the expenses flowed through from the corporation;
- federal and provincial mineral exploration flow-through share tax credits;
- the Charitable Donations Tax Credit and
- relief from capital gains tax, including tax on the portion of the gain based on the deemed zero cost base.
The net result was a very small after-tax cost. This advantageous tax result changed for flow-through share agreements entered into on or after March 22, 2011.
Unlike other publicly-traded securities that are donated, the elimination of tax on the capital gain will apply only to a subsequent donation of a share in a particular class, a right to that share or any property that is identical to the share or right. The qualifying amount must exceed an exemption threshold at the time of donation, rather than the entire amount that otherwise would be calculated on the zero cost base.
A taxpayer’s exemption threshold in respect of a particular class of shares will be reset at nil at any time that the taxpayer no longer holds any shares of that class. As well, an anti-avoidance rule will apply to the donation of property acquired by a donor in a tax-deferred transaction (a “rollover”).
For a single purchase and donation of flow-through shares, this means that the only portion of the gain on donation that would be exempt is the amount by which the fair market value of the donated shares exceeds the original amount paid for those shares.
Where some shares are sold and a capital gain reported prior to the donation of shares of the same class, the threshold of the exempt gain is reduced by the capital gain on the sale.
Be sure to check out how a flow through share can help reduce this year’s taxes with a Tax Services Specialist before making the investment.