How to increase your tax benefit for charitable donations

Towards the end of the year, people often start thinking about which charitable organizations they’d like to support. You likely already know that the Canada Revenue Agency (CRA) provides an extra incentive by giving you a tax credit for your donation, but what you may not know is that you can get an even greater tax benefit when making your donation using stocks instead of cash. Here’s how.

Everyone is familiar with the typical process. You write a cheque or donate cash to a charity. Assuming the charity is properly registered with the CRA, you will get a tax receipt which you can use on your tax return to get a tax credit. Pretty straightforward.

Now let’s assume you wanted to make a donation but didn’t have cash on hand. You may decide that it’s the right time to sell one of the winners in your investment account to raise the cash, so you could make the donation. Since the investment is worth more than what you paid for it, there will be tax to pay on the gain when you sell it. If you were in Alberta, and you were in the top marginal tax bracket, then for every dollar you had gained on your investment you would be paying 24% in tax (capital gains are taxed at half the ordinary tax rate). You then take the cash that you just raised and make the donation. You won on your investment, you helped out the charity of your choosing, and you are feeling pretty good about life in general.

But it could be better.

What you likely didn’t know is that most charities actually have a brokerage account and are set up in a way that you can directly transfer your securities (stocks / fund units) from your investment account to theirs. The beautiful thing about this arrangement is that the gain you had on your investment is no longer subject to the 24% tax because it was donated to a charity. The bigger the gain you have on your investment, the bigger the tax benefit you’ll receive by donating shares. You will still get a donation receipt equal to the full value of the securities that were transferred on the date that the transfer occurs.

Let’s look at an example and compare the after-tax benefit of a cash donation versus a donation of stock that has a sizeable capital gain.

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As you can see, the after-tax cost to donate in option two is nearly half that of option one, and the charity you’re supporting would receive the exact same amount in either case. To maximize the tax benefit, you would want to donate the stock or fund in your portfolio that has the highest unrealized capital gain per share/unit.

When preparing your tax return, your accountant will note the donation of shares on form T1170, Schedule 3, and also on your summary of donations. For a qualified tax professional, the tax reporting is quite simple – so long as they know. So don’t forget to tell them!
cra-form_capital-gains-on-gifts

 

As a word of caution, it’s best not to use this as a last-minute strategy. The administrative time to process a stock donation can be up to two weeks – sometimes longer. The closer to year-end that you wait, the longer it will take, because both financial institutions and charitable organizations tend to get backlogged in December. The process requires more thought and planning than simply writing a cheque, so it may not be worth the effort for smaller donations. However, the next time you are planning to make a generous donation, consider closing your chequebook and opening your investment portfolio.

Before you decide whether this gift-giving strategy is right for you, speak to your financial planner. I can help too.

Aaron Hector has been a consultant at Doherty & Bryant Financial Strategists, a subsidiary of T.E. Wealth, for nearly 10 years. He provides comprehensive financial planning to high-net-worth individuals and families in Western Canada, and has extensive experience in executive compensation plans, retirement planning, and income tax reduction strategies. As a dual citizen of Canada and the USA, he also has a passion for cross-border financial planning.

Notes:

1. The federal donation tax credit rate is 15% on the first $200 of donations and 29% or 33% thereafter. It is 29% if your taxable income is lower than $200,000 and 33% if your taxable income is higher than $200,000. The 33% tax credit rate was brought forward as part of the proposed legislation in Bill C-2 was and is expected to form part of the legal tax framework for donations made in 2016 and onward.

2. Each province has its own provincial tax credit rates. Similar to the federal credit, the provincial tax credit rates are also lower on the first $200 of donations.

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