FOR DONORS

Maximizing Your Tax Benefit

Donors rarely give purely to receive a tax benefit. But once a decision to give has been made, it certainly helps to receive the maximum tax advantage for your gift!

It is important to consider what method of gifting is most effective for your own personal situation.

All charitable gifts to the Central Okanagan Foundation are eligible for a tax receipt; however, some methods of giving may be more advantageous for you than others. Please contact our executive director at 250.861.6160 for more information or consult your own financial advisor for advice on your individual situation.

History of "Gifting Appreciated Securities":

  • In 1997 the federal government reduced capital gains tax on donations of stock by 50 per cent on a five-year trial basis. The result was a three-fold increase in gifts of publicly traded securities to charities – from $69.1 million to $200.3 million between 1997 and 2000. The percentage of stock donations jumped from 1.6% to 3.9% of all donations. In 2001, the government made the capital gains reduction permanent.
  • A recent TD Economics report shows Canadians hold $1.3 trillion in stocks – almost half of which are unrealized capital gains. The elimination of capital gains on donations of appreciated securities to charity could unleash a windfall of giving.
  • On May 2, 2006 The Conservative government eliminated capital gains tax on donations of publicly listed securities to charities, effective immediately.

NOTE TO READER:
The purpose of this publication is to provide general information, not to render legal advice. In addition any changes in the tax structure may affect the examples listed in this information. Please consult your own lawyer or other professional advisor about the applicability of this information to your situation.

 

How it works

Usually, one-half of a capital gain is subject to tax; with gifts of publicly-listed securities, that amount is eliminated when the gift is made to a charitable organization or a public foundation, such as a community foundation (1).

Listed securities include:
  • Shares, rights, and debt obligations listed on most Canadian and certain foreign stock exchanges (2)
  • Prescribed debt obligations
  • Shares of the capital stock of a Canadian public mutual fund corporation
  • Units of widely held Canadian mutual fund trusts
  • Interests in related segregated fund trusts
1 - Publicly-listed shares that are acquired under an employee stock option plan may also qualify for this incentive provided certain criteria are met.
2 - Securities that are listed on Toronto, Montreal and tiers 1 and 2 (but not 3) of the TSX Venture Exchange qualify for this incentive, as do those that are listed on the NYSE, Nasdaq (excluding the Over-the-Counter Bulletin Board) and most other major foreign exchanges.
The benefits of these gifts include:
  • Immediate donation receipt for fair market value of security, determined for most securities from their closing price on the date of the gift
  • Favourable reductions in capital gains taxation
  • Charity pays no tax on sale
  • Gifts can be given during donor's lifetime or after, through their estate
Securities may be transferred to a charity in either of the following ways:
  • The donor delivers endorsed certificates to the charity. The gift is complete the day the certificate is delivered. A donation receipt is based on the value of the security that day.
  • The donor transfers the securities from his/her brokerage account to the charity's account. The gift is complete when the securities are actually transferred to the charity's account.

 

Incentive to Give

The income tax system supports the generosity of Canadians by providing a tax credit for donations to registered charities. This incentive is good public policy because each dollar of tax revenue that is lost through donations results in $2.25 that is put to work in the community.

At the same time, the income tax system presents a barrier to giving. Many would-be donors have their assets invested in securities that have appreciated in value. Selling these securities to generate cash to make a donation will trigger capital gains taxes that partially offset the tax credit incentive.

The following illustrates the additional tax savings that donors realize when making gifts of appreciated publicly-listed securities rather than cash and the additional savings that are available now that the government has eliminated the taxation of gains in respect of such gifts.

Example: Donation of Capital Property versus Cash (3)

Mr. Price is considering a $100,000 donation to his favourite charity, and has sufficient net income to claim the full amount of the donation in the year in which it is made. Among his assets are 1,000 shares of Publico, a publicly listed corporation. He also has $100,000 of available cash.

The shares have a fair market value of $100,000 and an original cost of $1,000.

Mr. Price is evaluating three alternatives: making a $100,000 cash donation; selling the Public shares and giving the cash to charity; or transferring the Public shares to charity for the fair market value of $100,000.

We have assumed that Mr. Price is in the top marginal tax bracket (taxable income in excess of approximately $116,000) and that the combined federal and provincial top marginal rate is 45%4.

What is the net tax benefit of the donation Gift Cash Sell shares and gift cards Gift the shares:
capital gains tax is eliminated
Proceeds/deemed proceeds of sale/donation $100,000 $100,000 $100,000
Cost 100,000 1,000 1,000
Capital Gains (proceeds less cost) N/A 99,000 99,000
Tax on captial gain N/A (22%) 21,780 (0%) Nil
Donation tax credit (45,000) (45,000) (45,000)
Net tax savings from donation (available to shelter other income from tax) 45,000 23,220 45,000

 

Effect on Net Worth of Donation of Shares (5)

Now let's evaluate the effect on Mr. Price's net worth, comparing a sale of the shares with gifting the shares under the current tax rules and if the government eliminates the tax. Mr. Price’s current net worth is $1,000,000.

What is the after-tax cost of making the donation? Gift Cash Sell shares and keep cash Sell shares and gift cash Gift the shares:
capital gains tax is eliminated
Net worth before sale / donation $1,000,000 $1,000,000 $1,000,000 $1,000,000
Donation 100,000 0 100,000 100,000
Tax on sale / donation N/A (21,780) (21,780) Nil
Donation tax credit 45,000 N/A 45,000 45,000
Net worth after sale / donation 945,000 978,220 978,220 945,000
Summary        
Value to charity 100,000 N/A 100,000 100,000
Cost to donor 55,000 N/A 55,000 33,200
Government foregone taxes 45,000 N/A 45,000 66,7806
5 - Please refer to footnote 3.
6 - With the tax on the gain eliminated, the government will forego revenues of $21,780 – the tax that would have been payable if the shares were sold plus the $45,000 taxes saved as a result of the donation tax credit.

Professional Advisors Reference Manual and Resource Guide – Copyright 2009

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