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Charitable Giving and Taxation 101

25/06/2012


​Regardless of whether charitable giving occurs during your lifetime or upon death, there are some significant tax issues of which you should be made aware.

Cash Donations

Charitable donations paid personally are treated as a credit on your personal income tax return in the year made and can be carried forward for five years. The amount of the gift reduces taxes otherwise payable. As a result, the true after-tax cost of the donation is the amount of gift less the income taxes saved. An Ontario resident taxed in the highest tax bracket would have an effective cost of 53.6%.

Donation of Shares

However, if the donation is in the form of capital property the effective cost can be less. Normally, a donation of capital property is deemed to take place at fair market value. The result of this is that any appreciation in value is first taxed in the vendor’s hands. Alternatively, where a donor makes a gift of:

  • Shares, rights or debt obligations (bonds etc.) listed on a prescribed stock exchange;
  • Shares of the capital stock of a Canadian public mutual fund corporation; and/or
  • A unit of a widely held Canadian mutual fund trust,

The taxable capital gain on the property is deemed to be nil for tax purposes.

For example, assume you are an Ontario resident taxed in the highest bracket and you wish to donate $3,000 to charity. You own investments valued at $3,000 with an original cost of $1,000 do you cash in the investments and donate the cash or do you donate the securities directly?

  1. Cash in investments and donate cash –
    1. Capital gain of $2,000, pay taxes of $464
    2. Donate the remaining $2,536
    3. Receive a tax credit of $1,176 ($2,536 x 46.4%)
    4. True cost = $1,824 ($3,000 - $1,176)
  2. Donate the securities –
    1. Capital Gain is not taxable
    2. Donated amount = $3,000
    3. Receive a tax credit of $1,392
    4. True cost = $1,608

In this example, there is a reduced cost of $216 for donating securities directly. This amount can become quite significant if your investment portfolio has relatively large unrealized gains.

When it comes to including charitable giving as part of either your inter-vivos plan or your estate plan, there are many options available to you, such as donating investment accounts, RRSPs, life insurance proceeds, artifacts, etc. Contact us to learn which plan makes sense for your tax situation.