The Canadian tax code provides generous benefits to investors who wish to support causes that are aligned with their values. Charitable donations can be many things, not just cash, including gifts such as paintings, rare books, shares, real estate, or even a life insurance policy.
There are many different types of charitable organizations, and a full list of Canadian charities can be found here. One route for giving is through something called a Donor-Advised Fund (DAF). These are an efficient way for clients to make charitable donations of securities that benefit their chosen charities and, at the same time receive tax benefits. A DAF is an independent account that is setup through a public foundation, like the Vancouver Foundation, for an example that’s close to home. After the donor makes a receiptable contribution, the foundation has ownership of the funds. However, the advising donor retains advisory privileges with respect to the granting of funds to other charities of their choice over time, as such ensuring a legacy of giving long into the future. This means the direction of a DAF could change over time. A DAF is meant to exist and effect change, forever.
One type of donation that may be of particular interest to our clients is that of In-kind donations of publicly listed securities to charitable organizations and public and private foundations. You know, those names sitting in your investment account that have done well over the years.
There are two major benefits that can be enjoyed by gifting securities:
- These donations are exempt from capital gains tax upon contribution.
- They are also eligible for the charitable donation tax credit based on the (appreciated) fair market value of the securities donated.
This becomes an effective strategy to transfer shares with unrealized capital gains directly to a charity so that the donor (you!) does not pay tax on the capital gains, and still receives a tax credit as if you had taken the same amount of cash out of your pocket and donated it directly.
So how do the taxes work exactly? A client’s charitable donation, up to 75% of their income, can qualify for a federal tax credit. This federal tax credit is tiered into two chucks: 15% for the first $200 and 29% on the balance. Then clients also get a provincial tax credit, which can vary depending on province. BC offers 5.06% for the first $200 and 16.8% on the balance. ON offers 5.05% for the first $200 and 11.16% on the balance.
When the federal and provincial tax credits are combined, donors can receive nearly 50% of a donation returned to them when they file their taxes.
As an example, let’s assume you purchased a stock many years ago for $1,000 and today that stock is worth $10,000. If you were to now sell that stock, you would incur a capital gain of $9,000. Only half of a capital gain is taxable in Canada so you would pay tax on $4,500 at your marginal tax rate. If we assume that rate to be 40%, then the tax bill will shave $1,800 off of the gain and you would net $8,200 in your pocket. CRA gets a nice chunk, and nothing there for charity of course.
If however, you donated that $10,000 worth of stock to charity, you would receive combined Federal and Provincial tax credits totaling roughly $4,600. You have still turned your $1,000 purchase into $4,600, net in your pocket. but the charity you have chosen is now ahead by $10,000, and if structured to spin off income for the recipient of a bursary award for instance, then your $10,000 contribution can have a positive impact on lives forever, even after you have passed away.
To sweeten the pot, donations need not be claimed in the year they are paid. These credits can be carried forward to any of the next 5 years to reduce your tax bill.
Overall, charitable giving can play a significant part in the plan for passing your estate to future generations, and how you as a client can build your legacy and ensure that your philanthropic activities can live forever.