Business Law, Law Practice, Taxation law

Flow-through transactions for donation purposes post-2014 Quebec budget

Jul 10th, 2014

By Alexandre Dufresne

The Quebec Minister of Finance announced in its recent budget that the additional Quebec flow-through deductions would each be reduced from 25% to 10%. In the past, Quebec flow-through issuances to individuals usually provided a deduction of 100% plus two additional deductions of 25%, for a total of 150%.  As a result of the proposed legislation, the total deduction for Quebec flow-through issuances to individual subscribers will be limited to 120% of the issue price.

For purposes of donating flow-through shares, the change in legislation signifies that, for a straight donation transaction (i.e. where all of the flow-through shares are gifted), the net after-tax cost will be equal to 25% to 35% of the net donation to the charity (instead of approximately 15% pre-budget). As issuers recognize that the lower deductions may impede on their ability to raise funds in Quebec, they may be willing to work with better pricing models for the subscribers in order to reduce the net cost to 25% or less.  We have had preliminary discussions with some issuers regarding same without conclusive results yet.

It should be noted that the net cost can still be lowered to an amount less than 10% if a portion of the flow-through shares is not gifted. This requires a significantly higher cash outlay in order to obtain the same net donation.  Also, substantial income is required to offset the deductions and alternative minimum tax may become problematic.

The use of flow-through for donations by individuals still results in a lower net cost than if the donation is made without the use of flow-through shares (in which case the net cost is approximately 50%).

Alternatively, you may wish to explore using flow-through shares for the purposes of corporate donations. Corporate donations have typically been less attractive, as companies are not entitled to the extra Quebec deductions and the 15% federal tax credit. This provided flow-through issuances to individuals a significant advantage. However, now that the Quebec additional deductions are reduced from 50% to 20%, the playing field is leveled.

The advantage of a corporate deal is that the issuer is not required to use the flow-through funds for a property in Quebec. As such, you could participate in deals in other provinces, such as oil and gas deals; thus providing access to a greater number of quality issuances.  As you probably know, Quebec flow-through issuances have been very rare since the beginning of 2013. Furthermore, pricing oil and gas deals is usually better.

Corporate donation transactions are advantageous in certain cases where the use of corporate dollars is preferred.  The main advantage is that a company needs to purchase fewer flow through shares to obtain the same ”individual” donation amount. For example, for a net donation of $50,000, a company would have to subscribe for approximately $71,000 of flow-through shares; whereas an individual would have to subscribe for approximately $105,000 of flow-through shares.  The net cost for a company taxed at the high rate would be approximately 35% if all the shares are gifted.

The corporate donation transaction creates an inclusion in the company’s capital dividend account and does not create alternative minimum tax.

As is the case for a donation by an individual, the net cost can be significantly reduced if the company does not donate all of the flow-through shares.

If you are interested in participating in a flow-through transaction, either for an individual or for a company, please let us know how much you wish to purchase.  As deals remain scarce, all quality issuances usually sell out to those who have “reserved” their subscription amount in advance.

Alexandre Dufresne is the Managing Shareholder of Spiegel Sohmer Inc., a legal firm in Montreal.