Budget erases gains tax on stock gifts, boon for charities and some investors.

The federal government's Budget 2006 proposals to eliminate capital gains tax on donations of publicly-traded securities to public charities, has been welcomed whole heartily by the charitable sector. Financial analysts see possibilities of making money on the exemption. The change is effective on July 2, 2006. Stock gifts to private foundations may be included at a later date.

It is expected to bring a substantial rise in contributions. This measure is expected to reduce public revenues by $50 million in 2006-07 and 2007-08.

Since 1997, such stocks and other securities donated to charities were subject to tax on 25% of the gain in value. This budget proposes to exempt donations of publicly listed securities to public charities from any capital gains tax.

Donations of listed securities to private foundations will not be eligible at this time. The primary reason for this exclusion, according to the budget statement, is concerns regarding the adequacy of current legislative provisions to safeguard against potential conflicts of interest, which could arise when individuals with significant holdings in a corporation also have influence over the management of a foundation's holdings of the same corporation.

The Government plans to consult with private foundations and other interested parties with a view to developing appropriate self-dealing rules. If appropriate rules can be devised, the capital gains exemption for listed securities to donations will be extended to private foundations at the same time.

Georgina Steinsky-Schwartz, President and CEO of Imagine Canada, said that her organization "has been a strong advocate for this measure, and we are pleased about its inclusion in yesterday's Budget." She estimates that this new measure will bring in an additional $300 million in annual donations. When the capital gains inclusion rate was initially reduced in 1997, donations of listed securities grew from $69 million to about $200 million in 2004.

Don Drummond, Senior Vice President and Chief Economist, TD Bank Financial Group, predicts the elimination of the tax will give charities an even greater boost because "without any capital gains taxation, many donors will actually make money from a gift relative to what they originally paid for the stock." He explains, "the charitable donation credit could exceed the purchase price if the value of the shares has appreciated significantly."

Listed publicly traded
securities to public charities

                          Current    Proposed
                           (25%         (0%
                         inclusion   inclusion
                          rate on     rate on
                          capital     capital
                 Cash     gains)      gains)

Amount of
donation         $100      $100        $100

Tax credit (1)
 Federal          $29       $29         $29
 Provincial       $17       $17         $17

Reduction
in capital
gains tax (2)      --        $7         $14

Total tax
assistance         46%       53%         60%

Donor's
share of
the cost of
the
donation           54%       47%         40%

(1) Assumes that donor has made donations
totalling $200 or more in the year, so that the
top tax credit rate applies.

(2) Reduction from the standard 50% inclusion
rate that would apply if the individual sold the
security. Assumes that the adjusted cost base
of the security is $40.