December is here, trees are decorated, and Christmas songs are playing. It is officially the Christmas season! It seems as though winter and Christmas bring out the charitable side of people. Yes, Christmas is coming but so is a lot of charitable giving. 30% of donations happen in December with 5% of the annual amount happening on Dec 31 alone.
Giving is not just about making a donation. It is about making a difference.Kathy Calvin
There are several ways that donations can be accomplished aside from the standard of donating cash. Furthermore, if you are an incorporated business owner, there is a very effective and powerful way that you can make donations. Continue reading to find out how you can make your philanthropic goals as effective and tax efficient as possible.
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- Charitable Giving FAQs
- Donating Shares Rather Than Cash
- Selling Shares and Donating Cash
- Donating Shares Directly
- Donating Shares Directly from a Corporation
Charitable Giving FAQs
Is there a charitable giving deadline?
For charitable giving to be applicable for a given tax year, the donation must have occurred within that calendar year. For example, if you want to claim it on your 2021 tax return, you must donate before Jan 1, 2022.
Note that there is an exception to this rule that we will touch on later.
Who can I donate money to and receive a charitable receipt?
In order for your charitable giving to qualify for the tax credit, it must be given to a registered charity. For more information on charitable receipts and which charities qualify, check out Making a Donation.
Can I claim a previous donation?
As was said early, donations made by December 31 may be claimed in that tax year. However, any unclaimed donations can be carried forward for 5 years and claimed in the current year. Furthermore, donations made by your spouse or common-law partner in the current year or the previous 5 years can be claimed.
Is there a limit to how much I can claim?
There is a limit to the amount of charitable giving you are eligible to claim. You can claim up to 75% of your net income. However, in the year of death, a person can claim 100% of their income. Furthermore, for gifts of certified cultural property or ecologically sensitive land, you may be able to claim up to 100% of your net income.
How is the donation tax credit calculated?
When making a donation you receive a federal and a provincial tax credit. The rate a which those are calculated depends upon where you file your taxes.
The federal tax credit is calculated as follows: 15% on the first $200, and 29% on anything above $200. However, this calculation does change for income earners above the $200,000 level and incentives them further.
Provincial tax credits, as stated earlier, depend upon the province you file your taxes. In Manitoba, for example, it is calculated as 10.8% on the first $200, and 17.4% on anything above $200. Income has no bearing on the provincial tax credit calculation.
Here is an example: Bill has an income of $225,000 and wants to donate $30,000.
Federal tax credit calculation
- 15% on the first $200 = $30
- 33% of $25,000 = $8,250, which is the lesser of:
- The amount by which their taxable income exceeds $200,000 ($25K).
- the amount by which their total donation exceeds $200 ($29,800).
- 29% of $4,800 = $1,392 Which is the amount of their total donations for the year over $200 that is not eligible for the 33% rate ($29,800- $25,000).
Bill’s federal tax credit = $9,672.
Provincial Tax Credit Calculation (MB)
- 10.8% on the first $200 = $21.60
- 17.4% on the next $29,800 = $5,185.20
Bill’s total provincial tax credit = $5,206.80.
Bill received a total of $14,878.80 in donation tax credits.
For more information on this check out, Charitable donation tax credit rates.
Is cash the only form of Donation?
Donations can come in more forms than just cash, including the donation of securities from non-registered investment accounts. This leads to our charitable giving strategy.
Donating Shares rather than Cash
When it comes to charitable giving people often think of donations in the form of cash. However, cash is not the only way to make charitable donations, and you may be missing out on more tax savings.
Before we get into the alternatives to donating cash, let’s look at an example:
Bill has an income of $225,000 and wants to donate $30,000. Bill wants to take the money from his investment portfolio. He has shares of company XYZ that have an Adjusted Cost Base (ACB) of $10,000 that is now valued at $30,000. This means he will realize a capital gain of $20,000 if he sells the shares to make his donation.
Bill has two options. He can either sell the shares for $30,000 and donate the cash, or he can donate the shares directly to the charity. Let’s look at the difference between both of the options.
Selling the Shares and Donating the Cash
In this scenario, Bill will have to pay capital gains tax on the sale of the shares. This, in turn, increases the actual cost of the donation. Let’s look at the breakdown:
|Adjusted Cost Base of XYZ (ACB)||$10,000|
|Fair Market Value of XPZ Shares||$30,000|
|Taxable Capital Gains||$10,000|
|Capital Gains Tax (51% tax rate)||$5,100|
|MB Tax Credit||($5,206.80)|
|Federal Tax Credit||($9,672)|
|After-Tax Cost to Donate||$20,221.20|
Note: the table above assumes that the top marginal tax rate starts at $200,000. In reality, it starts at $210,000. This will adjust the amount of capital gains that would be paid slightly.
Donation of the Shares Directly
Now let’s look at the difference in the cost of charitable giving if Bill were to donate the shares directly.
|Fair Market Value of the shares||$30,000|
|MB Tax Credit||($5,206.80)|
|Federal Tax Credit||($9,672)|
|After-Tax Cost to Donate||$15,121.20|
By donating shares directly to a charitable organization Bill can avoid having to pay the capital gains tax in his name. In the above example, Bill was able to give the exact same gift but cut the cost he incurred by more than $5,000.
Donation of Shares Directly From a Corporation
This strategy is available to a smaller group of people. If you are an incorporated business owner with corporate investment assets it is likely more efficient for you to make the donation inside the corporation rather than in your personal name.
The treatment of a donation inside a corporation is similar to a personal donation. However, rather than receiving a tax credit, the corporation receives a tax deduction for the market value of the donation.
Further, the treatment of in-kind donations of eligible securities is treated the same, where the tax on any unrealized capital gain is eliminated because of the 0% inclusion. Now if you are really savvy you can see where this is going.
There is a notional account that corporations have access to called a Capital Dividend Account (CDA). When there is a credit in the capital dividend account, it allows the corporation to pay out a tax-free capital dividend to the shareholders. One way to generate a credit to the CDA is for the corporation to realize a capital gain. When a corporation realizes a capital gain, the tax-free portion of the capital gain is credited to the CDA. When we donated the securities directly, the entirety of the capital gain was tax-free rather than the normal 50%.
This is probably a little confusing but let’s take the same numbers as above. Let’s say Bill is the sole shareholder of an incorporated business and he has personal investments and business investments. However, rather than doing the donation in his personal name, he wants to do it in the corp because he was told it was more efficient. How would this play out?
|Sell Security and donate cash||Donate security directly|
|Fair market value of donation||$30,000||$30,000|
|Adjusted cost base||$10,000||$10,000|
|Taxable Capital Gain||$10,000||$0|
|Tax on Capital Gain @51%||$5,100||$0|
|Value of tax deduction||$15,300||$15,300|
|Total cost of donation||$19,800||$14,700|
|Capital Dividend Account Credit||$10,000||$20,000|
The total cost of the donation is calculated by adding the fair market value of the donation with the tax paid on the capital gain. Then you subtract the value of the tax deduction.
Not only was the total cost of the donation $5,100 cheaper when donating shares directly, the credit to the CDA account was also $10,000 larger. This means that the corporation can elect to pay out $20,000 rather than $10,000 as a tax-free dividend to the shareholder assuming there is cash and retained earnings in the corporation.
The year is coming to end and many people are thinking about year-end charitable giving. However, many people are still unaware of the above-mentioned strategy.
A word to the wise. Do not wait until the last minute to try and implement this strategy. It often takes longer for the donation to be processed due to backlogs on the charity’s end and administration on your investment administrators’ side. We recommend sitting down with your advisor sooner rather than later.
Let’s do everyone a favor and spread awareness about this strategy! Share this article with your friends and family. If you need help with your year-end charitable donations, contact us, we would love to help.
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Disclaimer: This Forbes Wealth Blog is for informational purposes only and does not constitute financial, legal, or tax advice of any kind. Please consult your legal, accounting, tax, investment, banking, and life insurance professionals to get precise advice relating to your particular situation before acting upon any strategy