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Capital Gains Reserve - Gifts of Non-Qualifying Securities to a Qualified Donee

Income Tax Act s. 40(1.01), 118.1(18), 118.1(19), 149.1(1)

Donations of non-qualifying securities, other than excepted gifts, do not qualify for the donations tax credit (individual), for a deduction (corporate), or for the elimination of the capital gain on donation of capital property. They do, however, qualify for a capital gains reserve, as described below.

Non-qualifying securities include:

	shares of a corporation with which you do not deal at arm's length, unless the shares are listed on a designated stock exchange
	obligations or another security issued by yourself, other than those listed on a designated stock exchange and deposits with financial institutions.

A donation or gift is an excepted gift if:

	the security is a share
	the donee is not a private foundation
	the taxpayer deals at arm's length with the donee, and
	where the donee is a charitable organization or public foundation, the taxpayer deals at arm's length with each director, trustee, officer and like official of the donee.

For instance, this reserve would apply when the owner of a private company donated shares of the company, perhaps preferred shares, to a private charitable foundation with which they do not deal at arm's length.

A reserve can be claimed for 100% of the capital gain resulting from the donation of a non-qualifying security, other than an excepted gift, to a qualified donee (see the Canada Revenue Agency (CRA) definition for a qualified donee). The reserve cannot be greater than the eligible amount of the gift. This is applicable for gifts made after December 20, 2002. The reserve can be claimed for each tax year ending within 60 months of the time the security was donated. However, the reserve cannot be claimed if, before the end of the tax year

	the donee disposes of the security, or
	the security ceases to be a non-qualifying security.

If this happens, the donation can be claimed as a deduction (corporate) or for a tax credit (individual) for the year. However, if the donee disposes of the security, only a disposition that is in exchange for property that is not another non-qualifying security of any party will qualify for the deduction or tax credit.

The reserve allows the donor to defer the income inclusion from the donation (any resulting income or capital gain) until the year in which a tax credit or deduction can be claimed for the donation.

If the security is not disposed of during the 60 month period, the reserve is not required to be added back to income after the end of the period. The result is that the capital gain is not included in income, but there is no donation tax credit or deduction allowed.

Assume an Ontario taxpayer has made a donation in 2016 of non-qualifying securities with a fair market value (FMV) of $60,000 and adjusted cost base (ACB) of $40,000, resulting in a capital gain of $20,000. The taxpayer has donated the securities to a qualified donee in 2016. The taxpayer has a marginal tax rate of 43.41%.

The donation tax credit rates are:

	First $200 - 15% Federal, and 5.05% Ontario = total 20.05%
	Amount over $200 - 29% Federal, and 11.16% Ontario = total 40.16%

Tax results:

	taxes on the taxable capital gain of $10,000 (1/2 x $20,000) @43.41% = $4,341
	donation tax credit (if the donee disposes of the securities within 60 months of the donation) will be $24,055.78 (20.05% x $200 + 40.16% x $59,800)

We will show what happens in 3 different situations:

The donee disposes of the securities in year 1
The donee disposes of the securities in year 3
The donee does not dispose of the securities within 60 months of the time the security was donated.

i. Donee disposes of the securities in 2016:

The taxpayer cannot claim a reserve, so will have a capital gain of $20,000. However, the taxpayer can claim the donations tax credit.

ii. Donee disposes of the securities in 2018:

The taxpayer can claim a reserve of $20,000 in 2016 and 2017, in order to avoid tax on the capital gain. In 2018 the reserve is added back to income, and the taxpayer will pay tax on the capital gain of $20,000. The donations tax credit can be claimed in 2018.

iii. Donee does not dispose of the securities within 60 months of the time the security was donated:

The taxpayer can claim a reserve of $20,000 in each of 2016 to 2020, avoiding any tax on the capital gain. The reserve is not required to be added back to income in 2021, so no tax is ever paid on the capital gain. However, the donations tax credit can never be claimed.

A taxpayer can elect to designate proceeds of disposition of an amount between adjusted cost base and fair market value, thereby reducing or eliminating the capital gain on the gifted property. This can be done when the property is gifted, or, in the case of non-qualifying securities, when the securities are disposed of by the donee. If it is known in advance that the donee will not dispose of the securities within 5 years, this election can be used when the gift is made, to avoid having to claim a reserve.

TaxTips.ca Resources

Election to Designate the Amount of Proceeds When Capital Property is Donated

Canada Revenue Agency (CRA) Resources

Reserve for a gift of non-qualifying securities

Form T2017, Summary or Reserves on Dispositions of Capital Property

Tax Tip: This can be useful to owners of private companies, but make sure you get professional advice because it is complicated.

Revised: September 20, 2024