As a portfolio manager, our No. 1 objective is to help our clients achieve their goals — both financial, such as a desired level of income in retirement, and non-financial, such as making a charitable impact.
When we have conversations with our clients, we obtain information on whether they would like to donate in the future, and to which charities they would like to donate. The purpose for gathering this information is so we can be proactive and develop a planned giving strategy for our clients. In order to receive a non-refundable tax credit for the donation, the charity must be a registered charity in good standing with Canada Revenue Agency (CRA) and issue an official donation receipt.
For individuals, eligible donations are considered non-refundable tax credits. We wrote a past article on using your stock portfolio to make donations. For those individuals who have either a Holding Company (HoldCo) or Operating Company (OpCo), they have the choice to make donations personally or from their corporation. We look at minimizing taxation for our clients over their lifetime, and it can be a balancing act to get money out of a corporation tax effectively. Donations can help facilitate this.
Donating public securities in corporations
Both Holding Companies (HoldCos) and Operating Companies (OpCos) can make donations of securities in-kind and receive a deduction for the donation against their income. Annually, corporations can claim gifts equal to 75 per cent of their net revenue, and there is a carry forward period of five years for donations, meaning the corporation is not required to claim all of the donation in one year.
In addition to the deduction, there is no capital gain on the securities donated in-kind and the corporation also receives a Capital Dividend Account (CDA) credit equal to the entire amount of the capital gain. This CDA credit can then be used to pay out a tax-free dividend to the shareholder(s) at a later date.
Example of gifting securities in-kind from a HoldCo
There are significant tax savings associated with donations of securities in-kind from a corporation. We will illustrate these savings with an example of Mr. Smith, a retired medical professional. Mr. Smith wishes to donate $100,000 to his favourite charity through ABC Ltd, his professional HoldCo that contains a portfolio of public securities. Mr. Smith is the principal shareholder of ABC Ltd, which was previously an operating company.
ABC Ltd purchased shares of a publicly traded company for $20 per share. The fair market value of these shares is now $50 per share.
| Amount of gift ($50 per share x 2,000 shares) | $100,000 |
| Cost base of stock ($20 x 2,000 shares) | $40,000 |
| Capital gain | $60,000 |
| Tax deduction worth 50.67 per cent of gift, the combined federal and B.C. tax rate for investment income earned by a corporation ($100,000 x 50.67 per cent) | $50,670 |
| Taxable portion of capital gain recognized at 0 per cent of capital gain ($60,000 x 0 per cent) | $0 |
| Tax on capital gain of 50.67 per cent ($0 x 50.67 per cent) | $0 |
| Net tax savings ($50,670 - $0) | $50,670 |
| Total tax savings calculation: | |
| Capital gains not paid ($60,000 x 50 per cent x 50.67 per cent) | $15,201 |
| Tax deduction worth 50.67 per cent of gift ($100,000 x 50.67 per cent) | $50,670 |
| Credit to Capital Dividend Account, amount of capital gain for future tax-free distribution to Mr. Smith, assuming 31 per cent marginal tax rate on ineligible dividends (tax savings on CDA distribution equals $60,000 x 31 per cent) | $18,600 |
| Total tax savings | $84,471 |
| Net after-tax cost of $100,000 donation of securities in-kind ($100,000 - $84,471) | $15,529 |
After factoring in the tax on capital gains that is not paid, the tax deduction, and credit to CDA account, a $100,000 donation of securities in-kind has a net after-tax cost to Mr. Smith of $15,529.
To pay out the tax-free capital dividend, Mr. Smith will have to file an election with the CRA. For further information on the CDA, please refer to our article on understanding tax-free capital dividends.
Example of selling securities and donating cash from a HoldCo
In the above example we illustrated gifting securities in-kind. Let’s see what happens if the securities were to be sold instead, and the cash proceeds from the sale donated to a charity:
| Amount of gift ($50 per share x 2,000 shares) | $100,000 |
| Cost base of stock ($20 x 2,000 shares) | $40,000 |
| Capital gain | $60,000 |
| Tax deduction worth 50.67 per cent of gift, the combined federal and B.C. tax rate for investment income earned by a corporation ($100,000 x 50.67 per cent) | $50,670 |
| Taxable portion of capital gain recognized at 50 per cent of capital gain ($60,000 x 50 per cent) | $30,000 |
| Tax on capital gain of 50.67 per cent ($30,000 x 50.67 per cent) | $15,201 |
| Net tax savings ($50,670 - $15,201) | $35,469 |
| Total tax savings calculation: | |
| Tax paid on capital gains ($60,000 x 50 per cent x 50.67 per cent) | $(15,201) |
| Tax deduction worth 50.67 per cent of gift ($100,000 x 50.67 per cent) | $50,670 |
| Credit to Capital Dividend Account, amount of capital gain for future tax-free distribution to Mr. Smith, assuming 31 per cent marginal tax rate on ineligible dividends (tax savings on CDA distribution equals $30,000 x 31 per cent) | $9,300 |
| Total tax savings | $44,769 |
| Net after-tax cost of $100,000 donation of securities in-kind ($100,000 - $84,471) | $55,231 |
In this example, the additional benefit of donating securities in-kind versus selling securities and donating the cash equates to $39,702 ($55,231 - $15,529).
For our clients who wish to make donations, we highly encourage them to donate shares that have appreciated in value for this very reason. There will always be an ultimate cost for charitable donations — you can never be in a net benefit situation.
Having said this, some of our clients have mapped out plans to help charities they are passionate about, while also reducing the amount that ends up in the pockets of the Canada Revenue Agency. In the example of donating securities in-kind above, it only cost $15,529 to gift $100,000.
By mapping out donations of securities in-kind, it can be advantageous from a tax perspective, while also helping to fulfill your philanthropic pursuits.
Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management, with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138, email greenard.group@scotiawealth.com or visit greenardgroup.com/secondopinion.
