When capital property is donated, there is a disposition for tax purposes, which may result in a capital gain. The fair market value (FMV) of the property donated is used as the proceeds of disposition, and as the amount of the donation. In some circumstances it may be helpful to designate the proceeds amount to be an amount less than FMV.
If any "advantage" was received (compensation or other benefits) in return for the donation (e.g., tickets, meals), the eligible gift for purposes of the donation claim is the proceeds of disposition less the advantage received.
Another benefit of donating capital property is that your total donations limit will be increased by 25% of the taxable capital gain on gifts donated, up to a maximum total limit of 100% of net income. See the Canada Revenue Agency (CRA) topic "calculating your increased donations limit" in the publication P113 Gifts and Income Tax.
Capital gains can be eliminated by donating certain types of capital property (qualified investments, prescribed debt obligations, or ecologically sensitive land) to qualified donees (see the CRA definition for a qualified donee). The taxable capital gain is eliminated for this type of donation made after May 1, 2006. For donations of this type of property made before May 2, 2006, the taxable capital gain was 25% instead of 50%.
It can be very difficult, if not impossible, for securities to be transferred in the last week of December. Trying to do so risks the possibility that the donation receipt will be dated in the following year. A donation of mutual funds can take several months, because the recipient of the donated securities must set up an account with the particular mutual fund involved. The recipient may require approval from their board of directors to set up an account, so timing will depend on how often the board meets.
The Federal 2015 Budget proposed to provide an exemption from capital gains tax for certain dispositions of private corporation shares and real estate which occur after 2016. This measure was not included in Bill C-59, which received Royal Assent on June 23, 2015. The 2016 Federal budget announced that this proposal would not happen.
See Donations of Private Corporation Shares and Real Estate on the Budget 2015 website and on the Budget 2016 website.
CRA has the following information on their site regarding donating capital property:
Transferring personal assets into a business is quite a common occurrence, however many people don’t realize there are tax implications that follow these types of transfers, such as input tax credits that GST/HST registrant may recover. Each business structure, such as a sole proprietorship, partnership, or corporation, each has different rules applied to the transfer of assets. The transfer of assets into a Sole Proprietorship is the least complicated of the types of transfer into a business. When assets are transferred into the business, it is done so at its fair market value. Basically, fair market value is what one party would pay on the open market for the property of a second party, both at arm’s length. For example, if someone was to transfer several computers that are three years old, they would not be able to transfer the original purchase price of the asset, instead they can only transfer what the open market would currently pay for the assets. The fair market value of the assets transferred becomes the opening undepreciated capital cost.
In a partnership business structure, transferring assets into that partnership is a little more complex. The assets value transferred into the partnership may be different from the fair market value under certain conditions. The elected value of the assets becomes the proceeds of transferred property, as well as the costs of the property to the partnership. If the elected value is greater than the original purchase price, the difference must be reported as a capital gain on the income tax & benefit return. An example of this is a property that is transferred to a partnership, where the overall value of the property has increased; the amount transferred into the partnership is the appraised price, while the purchase price (when the purchase was made several years ago) is lower than the current value; In this case a capital gain will be realized.
Transferring assets into a Corporation is far more complex than under a partnership or a sole proprietorship. Remember, this may also apply when you decide to incorporate an existing sole proprietorship or partnership. Similar rules apply to these transfers, such as the amount applied to the asset being different than the fair market value under certain conditions, as well as the elected amount being greater than the original purchase price and reporting capital gains. What differs is what’s called the Transfer of Property to a Corporation under section 85 as found on the CRA website.
A personal services business (PSB) operated by a corporation in any tax year refers to a business of providing services where:
1. a person who implements services on behalf of the corporation (an "incorporated employee", or
2. a person related to the incorporated employee
is a listed shareholder of the company, provides services to another entity, and the connection between the service provider and the entity receiving the service could possibly be regarded as an employee/employer relationship. However, if the corporation has more than 5 full-time employees throughout any given year it will not be considered to be operating a personal services company.
If the person implementing the services would be known as a contractor and not an employee, then the business would not be determined to be a PSB.
In 2015 Tax Court Case C.J. McCarty Inc. v. The Queen, a corporation providing project management services to a client was noted to be delivering those services as an independent contractor, NOT as a personal services business.
In 2004 Tax Court Case 758997 Alberta Ltd. v. The Queen, a company which was providing client services with a placement agency was found to be a PSB.
Personal Services Business – Limited Deductions
The Income Tax Act has the following permissible deductions regarding personal services businesses:
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Corporate Tax Rate for a Personal Services Business
PSBs are not allowed to receive the small business deduction and must pay tax at the normal corporate rates. Taxation years that begin after October 31, 2011, do not allow a PSB to receive a rate reduction, meaning they get a federal tax rate of 28%. In 2014, the total tax rate in Ontario would be 39.5%, and in BC 39%. The 2016 Federal Budget increased the federal tax rate for personal services business from 28% to 33%, effective for that year and all subsequent years. For corporate taxation years between 2015 and 2016, the increase will be prorated based on the number of days occurring after 2015.
Owners of PSBs would have to look into it to know if any profits should remain in the corporation, or should all be paid out as bonuses/salaries.
Canada Revenue Agency Resources
- IT-73R6 The Small Business Deduction
- IT-168R3 Athletes and Players Employed by Football, Hockey and Similar Clubs
