Year-End Tax Planning: Donating Publicly Traded Securities
Author: Peter Hobb, Baker Tilly Canada
Over the past year investors have experienced strong growth in their non-registered stock portfolios. Their portfolios likely include investments which have appreciated significantly and, when sold, will give rise to a significant tax liability. If you are in this situation and you are planning to make a large donation to a charity, you should consider transferring directly to the charity securities that have appreciated significantly for the amount you wish to donate.
A charitable gift of significant size is not only about giving a benefit to the charity, but it is also about meeting your philanthropic objectives. Although income tax minimization is not normally the main reason for giving, it is an important consideration. There may be certain strategies that are more effective than others in achieving your philanthropic goal. When making a charitable gift, it is important to get the proper advice to ensure that you will use the most effective way of giving to meet your philanthropic goal while maximizing the tax benefit of your gift.
Our income tax system offers very generous incentives to encourage people to donate to registered charities. One such incentive is to eliminate the taxable capital gain on qualifying securities if the securities are donated directly to a registered charity. You not only eliminate the tax on the capital gain, but you could also realize an additional income tax saving equal to 50.4% of the market value of the shares being donated over $200 if you are in the top tax bracket (taxable income over $246,752). If the donor is in a lower tax bracket the saving would be 46.4% of the amount of donations made over $200. If the securities are not donated directly to the charity, but, for example, are sold to raise cash to be used to make the donation, you would have to pay tax on the capital gains realized. To avoid the tax on the capital gains, the securities must be donated in-kind directly to the charity. Examples of qualifying securities include shares listed on a designated stock exchange, an interest in a segregated (insurance) fund trust and shares of the capital stock of a Canadian public mutual fund corporation. The income tax benefit of this strategy may be even greater if the assets are donated by a corporation.
This strategy has become even more attractive since the Federal Government has increased the capital gains inclusion rate for tax purposes from 1/2 to 2/3 on the portion of capital gains realized in excess of $250,000. Note that-gifts-in kind may be subject to Alternative Minimum Tax. The maximum amount of donations you can make in a tax year is 75% of your net income (100% in the year of death and in the year preceding death). Donation credits not used in the year can be carried forward and claimed in any of the five following years.
This strategy is also very effective for making a large donation through your will.
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ABOUT THE AUTHOR
Peter retired as a partner of Baker Tilly Canada in 2017 but has continued on as an associate in a part-time role.
Peter has been published in CA Magazine, local newspapers, and has appeared on local television reviewing topics ranging from building a successful business to income tax planning. Additionally, he presents on these topics to small and medium sized business owners and advisors.
Peter became a Chartered Professional Accountant in 1976 and a Certified Management Consultant in 2017. Before moving to the Durham Region, he worked at a national firm of Chartered Accountants in Toronto and conducted accounting research with the Canadian Institute of Chartered Accountants. Peter also holds a Bachelor of Technology in Business Management from Ryerson University.
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This article only touches on one strategy for making a significant donation. The information contained in this article is of a general nature and is not intended to address the circumstances of any individual or entity. No one should act upon such information without appropriate professional advice and a thorough examination of their situation.