The Canada Revenue Agency (CRA) provides significant benefits to those who make charitable contributions. The benefit is greater when the donation is shares in a public company or of mutual funds. An even bigger benefit may arise if you own shares of publicly traded companies or mutual funds inside a corporation.
Donating shares can be beneficial by eliminating the capital gains tax on the sale and allowing the claim for charitable donation deduction.
In this article, we will discuss these tax benefits.
Benefits of Donating Shares in Canada
Avoid Capital Gains Tax By Donating Shares
Normally, the capital gains inclusion rate is 50%, meaning that a taxpayer will face tax on one half of any capital gain realized on the disposition (including a donation) of assets that have grown in value. However, if the individual donates publicly traded securities or mutual funds that have appreciated in value, they can eliminate the tax altogether on the capital gain on those securities. This is because the CRA allows capital gains to be completely excluded if publicly traded securities are donated to a registered charity, thus, exempting this capital gain from taxation.
Donation Receipt Charitable Deduction
When an individual donates to registered Canadian charities in the form of cash, securities or cultural property, they earn valuable Charitable Tax Credits that help offset the taxes owing. The individual is entitled to a charitable donation receipt for the full value of the securities donated. This is useful while claiming a tax deduction for the donated amount.
This also proves useful in case the individual cannot claim the credit in the current year, and desires to claim the deduction in the future tax years. These donation receipts should still be maintained as they can be carried forward for up to five tax years.
Example: The following is an example of how this works.
Let’s say Person A purchased common shares in Public Company for a cost of $10,000 and the current market value of those shares has increased to $50,000. If he sell those shares and donate the cash proceeds, he would have a capital gain of $40,000 and owe tax on the capital gain of approximately $8.000. This of course depends on the province in which he lives and the applicable tax bracket.
This would leave the individual with $32,000 to donate and a tax receipt which reflects the smaller donation. Depending on the province, the credit for donations ranges between 40-50%. Assuming a 40% rate, they would receive a credit of $12, 800 ($32,000 x 40%). This would result in a tax savings of $12,800 less $8,000 or $4,800.
However, when the person donates the shares directly, they owe no capital gains tax and can donate the full value of $50,000. The tax savings would increase to $20,000 ($50,000 x 40%). So, the charity gets a larger donation and get a tax receipt which reflects the larger contribution.
Donations From a Corporation
If a donation of shares is made from a corporation, it qualifies for a tax deduction instead of a tax credit. When a person makes a donation through a corporation they are also eligible to utilize the Capital Dividend Account (CDA). The CDA will be increased by the tax-free portion of any capital gain realized by the corporation. Amounts paid out of the CDA are tax-free to the shareholder.
If the corporation has a positive balance in the capital dividend account, as a shareholder they can pay tax-free capital dividends to themselves as a shareholder.
In the above example, if the shares were held by an individual’s corporation, the $40,000 capital gain is still eligible for exclusion as it is a donation of public shares to a registered charity. This would save approximately $9,200 assuming 50% inclusion at a 46-per-cent tax rate (varies by province). Because the full amount of the gain was tax-free , the full $40,000 can now be transferred to the CDA. In the future, the person may pay this $40,000 to themselves tax-free.
The tax that would have otherwise been owing on that dividend would be about $12,400 at a marginal tax rate of 31 per cent (varies by province). In addition, the corporation will get a deduction for the charitable contribution of $23,000 ($50,000 x 46%). In total, the tax benefits would be $44,600 (9,200+12,400+23,000).
It is highly recommended that the individual consult a tax professional to properly execute the above and avoid any future tax complications, or issues.
In summary, if an individual sells shares and donates the cash proceeds, they will owe tax on the capital gain leaving them with less than the full cash value to donate and a tax receipt which reflects the smaller donation.
But when they donate the shares directly, they owe no capital gains tax and they can able to deduct the full value of the shares as a charitable contribution. The charity gets a larger donation and the person can get a tax receipt which reflects the larger contribution.
AG TAX LLP CAN HELP
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of US and Canadian tax laws as well as cross-border compliance.
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and Corporate Tax Returns
- Cross Border Taxation and Business Planning
- US Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement Planning
- Estate Planning, Inheritance Tax Advice
To obtain a quote or to arrange for a tax consultation to discuss your queries, please contact us at:
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.