The Department of Finance just released the “Notice of Ways and Means Motion to introduce a bill entitled An Act to amend the Income Tax Act and the Income Tax Regulations and Explanatory Notes“.
Essentially, these are changes relating to donations of appreciated public securities. These changes ensure that just as before the change, when no capital gains were paid, so after the change, no capital gains will be paid when someone donates appreciated public securities.
However, it is not discussed much in the charitable sector (because the charitable sector is quite selective about what it discusses). This is a very large benefit to some wealthy donors at a time of increasing inequality. The extremely large benefits that donors of appreciated public securities receive are now increasing even more. Is Finance doing the charity sector a favour or just hastening the demise of this tax incentive?
Here are some excerpts from the Explanatory Notes.
Charitable donation of employee option securities
ITA
110(1)(d.01)Paragraph 110(1)(d.01) provides a special deduction where an employee makes a qualifying charitable donation of a security acquired under an employee option agreement. The deduction is also available — by virtue of subsection 110(2.1) — where an employee immediately disposes of such a security and makes a qualifying donation of all or part of the proceeds of disposition.
The special deduction is generally equal to 1/2 of the employment benefit that the employee is deemed by subsection 7(1) to have received in connection with the acquisition of the security. To qualify for the special deduction, the employee must also be eligible for the regular employee stock option deduction under paragraph 110(1)(d), which is equal to 1/2 of the employment benefit. The net effect will generally be to eliminate any taxation of the employment benefit associated with the acquisition of the option security.
Consequential on the increase in the capital gains inclusion rate from 1/2 to 2/3, and the corresponding change in the deduction in paragraph 110(1)(d) from 1/2 to 1/3, paragraph 110(1)(d.01) is amended to increase the deduction rate provided for the donation of employee stock options from 1/2 to 2/3 of the employment benefit. This would continue to generally eliminate any taxation of the employment benefit associated with the acquisition of the option security.
This amendment applies to the 2024 and subsequent taxation years. The deduction provided under paragraph 110(1)(d.01) would continue to be 1/2 if the transaction, event or circumstance as a result of which a taxpayer is deemed to have received a benefit under subsection 7(1) occurred before June 25, 2024.
Additional deduction
ITA
110(1)(d.4)New paragraph 110(1)(d.4) operates in conjunction with new section 38.01, which provides for an effective inclusion rate of 1/2 (rather than 2/3) for the taxable portion of the net capital gains of individuals, graduated rate estates and qualified disability trusts, that do not exceed $250,000. This effective 1/2 inclusion rate is also available in respect of stock option benefits that are eligible for the deduction under paragraph110(1)(d), (d.1), (d.2) or (d.3), provided the combined total of capital gains and employee stock option benefits to which the 1/2 inclusion rate applies does not exceed $250,000. An individual may choose how to allocate their $250,000 threshold.
To provide for an effective inclusion rate of 1/2, new paragraph 110(1)(d.4) provides an additional deduction for stock option benefits that are eligible for the 1/3 deduction under paragraph 110(1)(d), (d.1), (d.2) or (d.3). This additional deduction is equal to 1/6 of the lesser of $250,000 and the amount determined by the formula
B – C
where
B is three times the total of all amounts deducted by the individual for the taxation year under paragraph (d), (d.1), (d.2) or (d.3). This is essentially, the value of all stock option benefits in respect of which a deduction was claimed, and
C is 1.5 times the amount deducted by the individual for the taxation year under paragraph (d.01). This is essentially the value of donated stock options. The deduction in paragraph (d.01), combined with the deduction in paragraph 110(1)(d), already provides a full deduction for the benefit realized on stock options where the shares are donated. This reduction effectively prevents an individual from applying any of their available $250,000 capital gains threshold against options that are already fully excluded from income.
The 1/6 additional deduction and the 1/3 deduction would together provide a 1/2 deduction for income where an individual has chosen to allocate part or all of their annual $250,000 capital gains threshold to income for which a deduction is available under paragraph110(1)(d), (d.1), (d.2) or (d.3). To the extent an individual deducts an amount under paragraph 110(1)(d.4), this would reduce the $250,000 annual limit available for capital gains included at 1/2.
This amendment applies to the 2024 and subsequent taxation years. For the purpose of determining the amount under the description of B and C, the amount determined for the individual for the taxation year under each of paragraphs (d), (d.01), (d.1), (d.2) and (d.3) shall exclude all amounts determined in respect of any transaction, event or circumstance, including a disposition or exchange of securities, that occurred before June 25, 2024.