Planning on donating to your favourite charity but don’t want to use up your liquid cash?
You may have other options that could still help you make an impactful contribution in your community but also help you improve your personal tax situation.
More options than you know
One way to do this is to consider donating your marketable securities. To incentivize charitable donations, the Canadian government provides tax credits for donations. Arguably the most advantageous strategy for savvy investors is to donate their appreciated marketable securities. Capital gains on the donation of marketable securities (such as publicly-traded stocks, government bonds, mutual funds, or trust units) are tax-exempt and the donation is valued at the securities’ fair market value at the donation date.
This can be extremely powerful if:
- You have investment positions that have appreciated in value but no longer fit your investment objectives or you are in a position to take market gains;
- You have investments in return of capital (“ROC”) products, such as T-series mutual funds or flow-through shares, have an adjusted cost basis that is near zero; and
- You are in a high marginal tax bracket and are interested in making a charitable donation.
How does it work?
Donations of marketable securities must be transferred “in-kind” to the registered charity. Typically, the security is transferred electronically to the charity’s brokerage account and the donation value is normally based on the closing price of the security on the day of receipt. Most charities sell the security immediately to ensure the value of the gift is realized.
Tax advantages
An individual can claim a tax credit on a qualified donation of up to 75% of their net income and 100% of their net income in the year of death and the year prior. Unused claims may be carried forward for up to five years and donations made in the year of death may be carried back one year.
Let’s take a closer look by using an example. Let’s say an Ontario taxpayer is earning a taxable income of $285,000, is donating 500 shares of publicly traded ABC stocks with a last traded price of $50 per share and a cost base of $20 per share.
* The 33% credit applies only to donations made after 2015 and the taxpayer has taxable income in the highest tax bracket (2021 – $220,000). Otherwise, donations will still receive the 29% credit. The federal top rate for donation credits provides an additional tax credit of $992 for the taxpayer with taxable income in the highest tax bracket.
The after-tax cost of this $25,000 donation to your favourite charity will be $9,995 compared to $14,008 if you donated cash – a 29% reduction!
Key considerations
- Must be a registered charity; ask for the CRA charity registration number.
- The biggest benefit occurs when you give away positions with the highest embedded gains.
- Beware of giving securities in a year with capital losses that can offset your gains.
- Strategy is most impactful in your high-income years.
Action points
- Call your accountant—find out what your estimated tax bill is.
- Call your advisor—look for gains to harvest.
- Consider this during your regular year-end tax planning routine.
Contact us today to learn more about the options available to you. CLICK HERE.
Learn more:
- Designating your digits assets
- Giving to get tax breaks
- Retirement and realty
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source https://richarddri.ca/get-tax-incentives-while-you-give-back/
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