Morneau should donate shares to charity instead of selling them first: experts
Liquidating the stock first would result in a big tax hit, argues accountant
Of all the headaches Bill Morneau is nursing these days, this might be the least of them: what's the best way to donate millions of dollars in stock-market gains to charity?
Nice problem to have, many Canadians might say.
But even finance ministers have to manage their money, and Morneau is doubtless well aware of the whopping tax bill that will accompany the sale of roughly $21-million worth of shares in his former company, Morneau Shepell.
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A cynic might suggest that's part of the reason he has decided to make a charitable donation out of the difference between what the shares are worth today and what they were worth in 2015 when he first became finance minister — a dollar figure roughly estimated at around $5 million.
Big tax hit
Donating that much to charity will bring a sizeable tax credit that should help to soften the blow. But experts have advice for anyone contemplating such a decision: donate the shares themselves instead of selling them.
It's in Morneau's interest to donate the value in shares, since liquidating the stock first would result in a big tax hit, particularly when it comes to capital gains, said accountant Robert Kleinman, executive vice-president of The Jewish Community Foundation of Montreal.
"It would be foolish to sell those shares, get the cash, and then donate the cash," Kleinman said.
"Look, he's going to be poorer by doing this. By donating, his total value — even with the tax savings — will be less because he's giving $5 million. But the cost of the gift will be relatively low."
Morneau's latest move is one of several he's made in recent days to counter opposition allegations that he profited from decisions he's taken since becoming federal finance minister two years ago. The transaction is expected to be conducted by a trustee under the guidance of the federal ethics commissioner.
The conflict-of-interest allegations stem from a pension bill, introduced in the House of Commons by Morneau himself, that could benefit Morneau Shepell, a human resources and pension management firm he helped build with his father.
'Don't liquidate the stock'
The concerns about Bill C-27 have caught the attention of the ethics commissioner, who says she's looking into the accusations to determine whether an investigation is necessary. For his part, Morneau has insisted from the outset that he was never in a conflict of interest.
He promised last week to sell all of his roughly one million shares in the company and place all his other substantial assets in a blind trust — a step he says the ethics commissioner told him in 2015 would not be necessary.
Until the shares are divested, they will remain behind a conflict-of-interest screen — overseen by the minister's chief of staff — to ensure he is recused from any discussions or decisions that could benefit his personal interests.
On Thursday, Morneau went a step further, vowing to donate to charity the difference in the value of the shares between the date he was elected in October 2015 and the day they're sold.
Kim Moody, a director at Moodys Gartner Tax Law, agreed that Morneau would be better off donating the shares directly, since the numbered company where the stock is held wouldn't have to pay taxes on any capital gains, since there would be none.
"Clearly, he's still net out of pocket, but at the end of the day it's pretty tax advantageous."
That approach would also allow Morneau to take $2.5 million out of the numbered company — tax-free — through a capital dividend account. In addition, Moody said, the firm would get that $5-million charitable receipt.
"Clearly if he's well-advised, which I presume he is, that would be the recommendation — don't liquidate the stock."