Did you know … There is a tax incentive for individuals who wish to donate publicly traded securities. These securities include shares, debt obligations or rights listed on a designated stock exchange, mutual funds, interest in related segregated funds and Government of Canada or provincial government bonds donated to charitable organizations, public or private foundations (hereinafter referred to as “charity”). The capital gains triggered upon the disposition of these donated securities is eliminated, resulting in lower income taxes.
Mechanics of the tax credit
When a donation is made to a qualifying charity, the donor is entitled to claim a tax credit on their personal tax return. Some examples of a qualifying charity are Canadian registered charities, Canadian universities, registered Canadian amateur athletic associations, certain universities outside of Canada and the United Nations. The tax credits reduce the amount of tax that the donor has to pay in a given year by reducing the federal and provincial taxes payable.
For the first $200 of donations being claimed, a non-refundable federal tax credit of 15% will be granted. This means that the amount of federal tax payable will be reduced by $30. After the first $200 threshold is passed, any remaining donation amount being claimed on the tax return for that year will result in a non-refundable federal tax credit of 29%. Thus if an individual claims a total of $1,000 in donations, the first $200 will generate $30 in federal tax credits, while the remaining $800 will generate $232 in federal tax credits for a total of $262 in federal tax credits. Provincial taxes payable will also be reduced.
The net effect for taxpayers in all tax brackets is that the portion of the charitable donation in excess of the first $200 will result in a tax savings approximately equal to the top marginal tax rate (except in Alberta where the tax savings are at a 50% rate and the highest marginal tax rate is 39%).
Combining the elimination of the capital gain when donating securities and the donation tax credit
When you donate a publicly listed security with accrued capital gains, you benefit from the elimination of the capital gain plus the donation tax credit. The combined tax savings can be quite impressive. The following example illustrates this point by comparing two alternatives for donating securities, assuming a FMV of $50,000, an adjusted cost base (ACB) of $10,000, and a tax rate of 46%.
Sell shares and donate cash
Donate shares directlyFMV of donation (a)
$50,000Adjusted cost base
$40,000Taxable capital gain
$0Tax on capital gain @ 46% (b)
$0Tax savings from donation tax credit (c)
$23,000Total cost of donation = (a) + (b) – (c)
This example demonstrates that there are tax savings to be realized by donating publicly traded securities with appreciated gains as opposed to first selling the publicly traded securities and then donating the proceeds. This means it costs you less to make a donation of securities instead of a donation of cash. In this example, a savings of $9,200 is realized by donating the appreciated property instead of selling it and donating the proceeds. The difference is a direct result of the eliminated capital gains on the donated securities.
For more information
The content in this article is for information purposes only and should not be taken as tax or legal advice. Prior to implementing any strategy, it is essential that you discuss your situation with a qualified tax or legal professional.
Information in this article has been provided by Josh Opheim, Investment Advisor, RBC Wealth Management, Dominion Securities