Charities have seen a significant increase in the demand for their services due to the COVID-19 pandemic, while also reporting a decline in their revenues because of the current unfavourable economic climate. The donation of shares directly to charities constitutes an attractive alternative for both parties, as it enables individuals to provide charities with the funds needed to continue providing services, while significantly lowering their tax bill.
Usually, when a donation is made to a registered charity by an individual, a tax credit can be claimed on their personal tax return on both the federal and provincial levels, which will effectively reduce the federal and provincial taxes payable in the year it was made. Any unclaimed donations can be carried forward for the next five years. A charitable donation can only be claimed for up to 75% of the net income of the individual for the year.
…a tax credit can be claimed on their personal tax return on both the federal and provincial levels, which will effectively reduce the federal and provincial taxes payable in the year it was made.
From a tax perspective, a cash donation works as follows: Mr. X wishes to donate an amount of $10,000 to a charity by disposing of the shares of a publicly traded corporation he acquired five years ago at the cost of $5,000. Assuming he is an Ontario resident and that the highest marginal tax rate of 53.53% is applicable; this will result in a tax payable of $1,338 (assuming the shares are sold first and the cash generated by this sale donated afterwards to the charity).
Instead, if Mr. X donated his shares, the taxes on capital gains would be eliminated. As illustrated below, the net cost of the first option, i.e., the sale of the shares and the donation of the cash, amounts to $6,697, while the net cost is $5,359 for the donation of shares directly. Donation of shares would result in a saving of $1,338, being the capital gains that would have been generated if Mr. X sold his shares and did a cash donation.
| Sale of shares and donate the cash | Donation of shares | |
|---|---|---|
| Fair market value (1) | $10,000 | $10,000 |
| Adjusted cost base | $5,000 | $5,000 |
| Capital gains | $5,000 | $5,000 |
| Taxable capital gains (50% of the capital gains) | $2,500 | |
| Tax payable (2) | $1,338 | |
| Tax savings from donation tax credit at 46.41% (3) | $4,641 | $4,641 |
| Total cost of the donation (1) + (2) – (3) | $6,697 | $5,359 |
There are also tax savings for donation of shares by a corporation. In the case of a corporation, such donation will result in tax deduction rather than a tax credit, thus reducing effectively the taxable income of the corporation. Taxes on the capital gains resulting of the disposition of such donations are removed when shares are donated directly. For a Canadian controlled private corporation which makes a qualified donation, the 100% of non-taxable portion of the capital gain is added to the Capital Dividend Account (“CDA”). The CDA account, can be paid to shareholders on a tax free basis.
While the donation of shares directly is an attractive option, there are associated conditions. It only beneficial if the shares donated have an accrued capital gain, otherwise, no capital gains will be shielded. Furthermore, to qualify for this treatment, the donated securities must be:
- Shares, debt obligations or rights listed on a designated stock exchange;
- Units of mutual funds trusts;
- Interests in related segregated funds or
- Prescribed debt obligations that is not a linked note (ex. a government of Canada or provincial government bonds).
The donation must also be made to a qualified donee. The term “qualified donee” designates an organization that can issue donation receipts for the gifts they receive from individuals or corporations. The Canada Revenue Agency maintains a list of qualified donees who may issue such official donation receipts. As such, it would be important to ensure that the charity is a qualified donee and to verify that it can accept in-kind donations.
This article is a general discussion of certain tax and accounting matters and should not be relied upon as tax or accounting advice. If you require tax or accounting advice, we would be pleased to discuss the issues in this article with you.
