Last week, the federal government released its 2015 budget. The budget contains a number of proposals to amend the Income Tax Act, and also provides updates regarding previously announced tax measures. One of the proposed changes announced in the budget will be especially relevant to business owners who are considering a future sale of their business.
Currently, if shares of a private company are sold, and the proceeds are donated to charity, the donor is entitled to a donation tax credit (if the donor is an individual) or deduction (if the donor is a corporation). However, unless the donor is eligible for the lifetime capital gains exemption (discussed in a previous post), the donor also realizes a capital gain on the disposition of the shares, which is subject to tax. The Income Tax Act includes exemptions from capital gains tax where the property donated is a gift of ecologically sensitive land, certified cultural property or publicly listed securities, but there is no capital gains exemption for gifts of real estate or private company shares.
The budget proposes to extend the exemption from capital gains tax where the proceeds from the sale of private company shares and real estate are donated to charity. This exemption will apply where: (1) cash proceeds from the sale of private company shares or real estate are donated to a registered charity within 30 days of the sale; and (2) the shares or real estate are sold to a purchaser that is dealing at arm’s length with the donor and the registered charity. If only a portion of the sale proceeds are donated to charity, only that portion of the capital gain will be exempt from tax.
Although the scope of the exemption will become more clear once draft legislation is released, at this point it does not appear that the exemption will apply where private company shares are donated directly to a charity. As a result, the shares will need to be sold to a third party in order to benefit from the exemption.
These new rules will apply to dispositions that occur after 2016 and will provide additional tax planning opportunities when shares of a private company are sold.