Be Careful When Donating Publicly Listed Securities
By Amanda J. Stacey & Troy McEachren
High-net worth clients who plan to donate publicly listed securities (e.g. public company shares, ETFs, mutual fund units, etc.) to charity should be aware — and wary — of proposed tax changes in the 2023 Federal Budget.
Introduced in 1986, the federal alternative minimum tax (“AMT”) is an alternate tax to the income tax payable under the regular tax rules (“non-AMT tax”). The AMT targets high-income individuals who would otherwise take advantage of sufficient tax preferences (i.e. receiving income from tax efficient revenue sources or benefitting from certain credits and deductions) to reduce their tax liability to extremely low levels.
The AMT is likely to be triggered in a taxation year when a taxpayer claims the lifetime capital gains exemption or invests in flow-through shares since these tax incentives allow the taxpayer to significantly reduce their taxable income. The AMT is “alternative” since taxpayers must pay the AMT or non-AMT tax, whichever is higher. When AMT is payable, the difference between AMT and non-AMT tax can be carried forward for seven years and be deducted from the non-AMT tax in excess of AMT due during those years. However, in the 2023 Federal Budget, the federal government has proposed changes to the AMT (starting in 2024) that may cause high-net worth individuals to re-evaluate their charitable giving plans and practices.
Donations of publicly listed securities
Currently under the Income Tax Act, two tax benefits arise from donating publicly listed securities: no capital gain is calculated for both non-AMT tax and AMT purposes; and 100 percent of the charitable tax credit arising from the donation can be used to reduce both taxable income for non-AMT tax and AMT purposes.
For many individuals, a common strategy to reduce AMT is to make donations of publicly listed securities when large capital gains would otherwise be realized on the sale or disposition of those securities. However, with the 2023 Budget proposal, the federal government intends to include in the AMT calculations 30 percent of any capital gains arising from donations of publicly listed securities to charities and reduce allowable non-refundable tax credits (such as the charitable tax credit) by 50 percent.
Raising the AMT exemption and AMT tax rate
In addition to changing how publicly listed securities are treated in the AMT calculation, the 2023 Federal Budget also proposes to raise the AMT exemption level and the AMT tax rate.
Currently, the AMT applies a flat 15 percent tax rate on an adjusted taxable income in excess of a $40,000 exemption. Under the new rules, the $40,000 income exemption will be raised to a $173,000 exemption, which will be indexed to inflation, and the tax rate of 15 percent will increase to 20.5 percent.
Illustration of proposed AMT changes
To show the effects of the proposed changes as a whole, we consider the example of a client donating $2,100,000 in publicly listed securities that have a capital gain of $2,000,000.
Under the current rules, this client would have to pay $27,833 in taxes. However, under the proposed changes, this same client would have to pay $193,049, which represents an additional $165,215 in taxes paid.
These changes clearly alter the incentives for high-net worth individuals considering major gifts of publicly listed securities with large inherent gains, which is an unfortunate development for the charitable sector. The tax benefits of giving public company shares to charity will not be as advantageous in 2024 and going forward, as they are now. Although the decision to make a major gift is never solely predicated on the tax benefits of doing so, it is hard to imagine this change won’t have implications for charities receiving large gifts.
Amanda J. Stacey and Troy McEachren are members of Miller Thomson LLP Social Impact group.