Tax Articles
Gifting Securities to Charity can Gift You with Generous Tax Break
The Lawyers Weekly - Focus on Financial Planning
Stephen Meek, CA
With the year coming to a close, so end many opportunities to reduce your 2006 personal income taxes. Before that happens, if you’re feeling charitable, you might want to take advantage of a new opportunity to give generously while also receiving a generous reduction in your taxes.
In the May federal budget, the government made it more attractive to gift securities directly to charitable organizations, exempting from capital gains tax donations of publicly listed securities to registered charities.
This is a significant change from the previous tax treatment of such donations, where 25% (half of the regular capital gains inclusion rate of 50%) of any capital gains triggered were taxed. The following investments are eligible for this special tax treatment.
-
Shares, rights and debt obligations (typically bonds or debentures) that are listed on a prescribed stock exchange (tiers 1 and 2 of the Canadian Venture, Montreal, Toronto and Winnipeg stock exchanges and most major foreign stock exchanges)
The only way to benefit from this tax measure is if you gift shares with an accrued capital gain. Comparing two scenarios demonstrates how this would work.
Two lawyers, Ann and Bob, wish to make gifts to their favourite charities from shares of publicly traded companies. Each purchased these shares, currently worth $5,000, several years ago for $1,000, thus the shares held by each person have an accrued capital gain of $4,000.
Ann sells the shares and donates $5000 in cash to a charity. Bob donates the shares directly to another charity.
In both instances, the shares are deemed to be disposed of for tax purposes at their fair market value of $5,000. Assuming both Ann and Bob have a marginal tax rate of 46.4% (the top tax rate for an Ontario resident in 2006), each would pay tax as outlined in the following chart.
Tax on Capital Gain |
| |
Ann Sells shares /
donates cash |
Bob Donates shares |
Proceeds of
Disposition |
$5,000 |
$5,000 |
| Cost of Shares |
(1,000) |
(1,000) |
| Capital Gain |
$4,000 |
$4,000 |
| Taxable Portion of Gain @ 50% |
$2,000 |
|
| @ 0% |
|
$0 |
| Tax @ 46.4% |
$928 |
$0 |
Ann would have to pay $928 in tax and Bob would pay no tax – the difference being the calculation of the taxable portion of the capital gain.
Both lawyers would receive a tax break based on the value of the donation. Since they pay tax at the top rate in Ontario, the tax savings from the gift would be calculated at 46.4% of $5,000, which is $2,320. The following chart demonstrates what the $5,000 donation would cost Ann and Bob.
Cost of Donation to Ann/Bob |
| |
Ann Sells shares /
donates cash |
Bob Donates shares |
Amount of
Donation |
$5,000 |
$5,000 |
Add: Tax on
Capital Gain |
928 |
$0 |
Less: Value of
Donation Tax Credit |
(2,320) |
(2,320) |
Cost of Donation
to Ann/Bob |
$3,608 |
$2,680 |
By gifting shares directly to a charity rather than selling and then donating the shares, Bob will save $928 in tax on the capital gain.
Feeling a little guilty about trying to save money on a charitable donation? Don’t. Whether you give cash or securities, the charity will end up with the full amount of your donation since brokerage firms assist these organizations in transforming gifts into cash.
So if you’re feeling charitable this year, gifting securities to a favoured charity will make you feel good twice: once for helping out a good cause – and once for helping out your income tax situation.
Stephen Meek is a partner of BDO Dunwoody LLP (www.bdo.ca). BDO is one of Canada’s leading accounting and advisory firms, which helps professionals, entrepreneurs and family businesses succeed. If you have questions about this article, or you would like to receive BDO’s “Tax Factor” newsletter, contact Stephen in the Markham office at 905-946-1066 or smeek@bdo.ca.
