Scott Park, CPA, CA
If you are someone that already donates to charities, good on you. But instead of cash, if you hold shares on which you have capital gains, you should be aware of the tax benefit of donating shares. Philanthropy and tax planning go hand in hand.
Avoid Capital Gains Tax
When capital property is donated, there is a disposition for tax purposes, which may result in a capital gain. The fair market value (FMV) of the property donated is used as the proceeds of disposition, and as the amount of the donation. A taxpayer will normally pay tax on 50% (one-half) of any capital gain realized on the disposition (including a donation) of assets that have increased in value. However, if a taxpayer donates publicly trades shares or mutual funds to a registered charity, the CRA allows capital gains to be 100% completely excluded from taxation.
Someone thinking of donating shares should always check CRA’s List of Charities to confirm whether a Canadian charity is registered.
Donations From a Corporation
If a donation of shares is made from a corporation, it qualifies for a tax deduction instead of a tax credit. Secondly, when a person donates through a corporation, they are also eligible to utilize the Capital Dividend Account (CDA). The CDA is a notional tax account that tracks the non-taxable portion of capital gains. Thus, the CDA will be increased by 100% of the capital gain realized by the corporation on the donation of shares as mentioned above. Amounts paid out of the CDA are tax-free to the shareholder.
Donating shares results in a win-win for you and the charity. You would get a larger tax benefit and the charity would get a larger charitable donation in lieu of selling the shares yourself, paying the tax and then making the donation with the after-tax cash.
Tax Tip: If you are an individual, your donation should be made by the end of November or earlier to avoid the busy season. If the donation is made by a corporation, it should be made at least one month before the fiscal year end. You should also consult with the registered charity to ensure they are setup to be able to accept the donated shares in the first place.
Disclaimer: The blogs posted on Scott Park & Co Inc. website provide information of a general nature. These blog posts should not be considered specific advice since each person's personal financial situation is unique and fact specific. Please contact us prior to implementing or acting upon any of the information contained in one of our blogs. Scott Park & Co Inc. cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.
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