Most people understand that giving a donation to a registered charity in Canada results in tax savings, but did you know there could be additional tax benefits depending on what you give?

Donating shares

If you or your corporation own publicly traded shares that have grown over time, once sold, a capital gain is realized and is taxed based on the current capital gains rules – 50% of the gain is considered the taxable portion, to which your marginal rate is applied.

However, if you were to donate these same shares to a qualified donee, the taxable portion of the gain is reduced to zero. This tax benefit is on top of the benefit received for making the donation, as you will also receive either a deduction of income (corporation) or a tax credit (individual) based on the fair market value of the shares at the time of donation.

What are the rules?

The donation has to be made to a registered charity or other qualified donee, and the donation has to be a publicly traded security, such as bonds, shares traded on a designated stock exchange, or mutual fund units. Additionally, the security must be donated directly to the charitable organization – if you sell the security first, then donate the cash, you will not receive the favorable tax treatment on the capital gain.

The normal rules regarding charitable donation still apply whether cash or securities are donated – eligible donations are limited to 75% of income in a particular year, but unused donations can be carried forward up to five years. Donations can be also claimed by an individual’s spouse or common-law partner, potentially resulting in increased tax savings.

Increased capital dividends for corporations

When shares are sold in a corporation, the non-taxable portion of the gain is added to the corporation’s capital dividend account. In the case where the corporation donates shares with unrealized gains, a third benefit is realized as the entire gain is added to the capital dividend account. This increases the amount of funds that can be withdrawn from the corporation on a tax-free basis.

Is this type of donation for me?

If you already intend to give to a charity and you have shares or mutual fund units that have grown in an unregistered investment account, you may be able to multiply your tax savings by donating the shares rather than cash.

There are multiple factors to consider when deciding how to donate, including deciding whether to give personally or through a corporation, how the donation will impact your overall tax and investment plan, and if there might be some unintended consequences related to the recent changes to the alternative minimum tax (AMT).

If you are considering a significant donation, contact us so we can advise on how to maximize the benefit of your generous gift.

Written by: Rob Fahie

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