Buried in budget: A charity kick-start

PAUL WALDIE – Globe and Mail Report on Business

March 7, 2008

When Toronto businessman Jim Fleck received some exchangeable shares in a family trust a few years ago he thought about donating them to charity.

Mr. Fleck soon discovered that the tax treatment for that kind of gift was far less favourable than donations of common stock or stock options. Convinced that wasn’t fair, Mr. Fleck led a seven-year campaign to change the tax laws. The effort has finally paid off.

Buried in last week’s federal budget was a provision to bring the tax treatment of donations of exchangeable shares in line with gifts of other securities. The announcement got little public attention but Mr. Fleck and others say it could lead to hundreds of millions of dollars in donations.

“What it allows is for people to give more money than they would otherwise,” said Mr. Fleck, 77, a former business owner, professor, bureaucrat and current chairman of the Council for Business and the Arts.

Exchangeable shares are common in corporate takeovers, particularly cross-border deals or sales of private businesses to public companies or income trusts.

Instead of paying entirely in cash, an acquiring company offers shares that are exchangeable into the company’s stock at a later date, thus delaying any tax on the capital gain.

The federal government has been making it easier for investors to donate stock and these types of gifts have soared in recent years.

In 2006, the government eliminated the capital gains tax on donations of securities. Last week’s budget extended that provision to gifts of exchangeable shares.

Not many investors actually own exchangeable shares, but those who do are sitting on billions of dollars. The total value of exchangeable shares in Canada is estimated at about $15-billion, according to information presented to a parliamentary committee.

“What you are going to see are some significant gifts,” said Malcolm Burrows, who runs philanthropic advisory services at Bank of Nova Scotia. “There’s not going to be a huge number of [gifts], but over a 10-year period I wouldn’t be at all surprised if it’s $1-billion at least.”

Mr. Burrows said he has a couple of clients, including people who sold a private business to a public company, who own exchangeable shares worth hundreds of millions of dollars. “The way that it’s [currently] structured it was almost as if, for donation purposes, these assets were frozen,” he said.

Mr. Fleck said he doesn’t own any exchangeable shares any more but he knows people who do and he is confident this change will encourage more donations. “What the government has done is great,” he said.

He said he was surprised the measure was included in the budget. He’d been writing memos about the issue to federal Finance officials for years and finally got the chance to meet Finance Minister Jim Flaherty a few weeks ago. “He seemed to be sympathetic to it,” Mr. Fleck recalled.

The measure caught many people in the charitable community off guard.

“Yes, I was surprised,” said Marvi Ricker, BMO Harris Private Banking’s vice-president and managing director of philanthropic services. “It makes sense that they would extend the [tax change] to other instruments where there [are] capital gains, because why not? All these tax incentives make it easier to give more.”

Jo-Anne Ryan, vice-president of philanthropic advisory services at Toronto-Dominion Bank, said the change is important given the recent hectic pace of mergers and acquisitions, where exchangeable shares often surface. “Anything that will encourage or help more charitable giving is welcome,” she said.