During the holiday season, the thoughts of many people turn to helping those less fortunate than themselves.
This year, charitable donations will be more important than ever because inflation has created hardship for many Canadians and people around the world. A recent Ipsos poll found that 22% of Canadians expect to rely on charities for help over the next six months. Yet, the Ipsos survey also reported that 20% of Canadians plan to give less to charities this year than last, making every dollar you give count even more. In my volunteer role as Chair of the board of the Depot Community Food Centre in NDG, I have seen first-hand how the demand has been increasing for our services.
To encourage giving, Canada has a generous tax credit system for donors, reducing the after-tax cost of donations substantially. For example, combined federal and provincial tax credits on a $1,000 donation made by a Quebec resident earning less than $221,708 would reduce the after-tax cost of the donation to $506.
The deadline to make a personal charitable donation and receive a tax receipt for 2022 is December 31.
Donating publicly traded securities
Your donation doesn’t have to be in cash. It may be better for you to donate publicly traded securities such as stocks, bonds, exchange traded funds or mutual funds. If those securities have declined in value, you can claim a capital loss as well as a donation tax credit for the fair market value of the securities on the date they are donated.
It’s even better if the investments have increased in value because the government exempts donated securities from the capital gains tax that you would otherwise pay when you sell them on the difference between their current value and what you paid for them (their adjusted cost base).
| Description | Sell shares and donate cash | Donate shares |
| Fair Market Value of donation (a) | $50,000 | $50,000 |
| Adjusted cost base | $10,000 | $10,000 |
| Capital gain | $40,000 | $40,000 |
| Taxable capital gain | $20,000 | $0 |
| Tax on capital gain (b) | $10,662 | $0 |
| Tax savings from donation tax credit1 (c) | $26,655 | $26,655 |
| Total cost of donation (a)+(b)-(c) | $34,007 | $23,345 |
1. Tax savings from donation tax credit assumes a Quebec resident at the top marginal tax rate.A strategy many people use when they want to make a substantial donation is to give securities from their portfolio to generate a tax credit and eliminate the capital gains tax. Then, they buy back the investment with cash after the donation is made.
Donating through your holding company
If you own an investment holding company, you can realize even greater tax savings. The corporation can give publicly traded securities and deduct their fair market value from its net income, reducing its overall tax bill.
In addition, the donated securities are exempted from the capital gains tax and the full value of the capital gain can be added to the corporation’s capital dividend account. The amount of that gain can then be paid out to the corporation’s shareholders tax free.
| Description | Sell shares and donate cash | Donate shares | Donate shares from a holding company |
| Fair Market Value of donation (a) | $50,000 | $50,000 | $50,000 |
| Adjusted cost base | $10,000 | $10,000 | $10,000 |
| Capital gain | $40,000 | $40,000 | $40,000 |
| Taxable capital gain | $20,000 | $0 | $0 |
| Tax on capital gain (b) | $10,662 | $0 | $0 |
| Tax savings from donation tax credit1 (c) | $26,655 | $26,655 | $0 |
| Tax savings from deduction in corporation2 (c) | $0 | $0 | $24,750 |
| Tax savings from CDA room created3 (d) | $0 | $0 | $16,044 |
| Total cost of donation (a)+(b)-(c)-(d) | $34,007 | $23,345 | $9,206 |
1. Tax savings from donation tax credit assumes a Quebec resident at the top marginal tax rate.
2. Tax savings from deduction in a corporation assumes the donation is deducted from investment income such as interest or foreign income.
3. The tax savings from Capital Dividend Account created assumes that the shareholder avoids paying tax on an eligible dividend at the top marginal tax rate for a Quebec resident.You can also donate other types of “gifts in kind,” including shares in a private corporation, works of art or real estate, but the rules get far more complicated. Gifts in kind other than eligible publicly traded securities are typically not exempt from the capital gains tax, with the exception of gifts of ecologically sensitive land and certified cultural property. Here, registered charities must follow Canada Revenue Agency rules on assessing the fair market value of a gift to issue an appropriate tax receipt and several extra steps are often required.
Limits on tax advantaged donations
There are limits to how much you can donate to receive tax credits or deductions. For individuals, the limit is 75% of your net taxable income (100% for Quebec residents on your provincial tax return). For corporations, the limit is 75% of net income.
You may carry forward donations for up to five years and claim donations made by your spouse or common law partner for up to five years.
If you’re thinking about making a substantial donation, please don’t hesitate to give us a call to discuss your options.