Planned Giving — A Gift That Gives Back
Charitable Donations of Securities
To encourage individuals to increase their charitable giving, there is a tax incentive for individuals who wish to donate publicly traded securities (stocks, bonds and mutual funds). Donors with investments that have grown in value can donate the investments and pay no capital gains tax, resulting in lower income taxes.
Mechanics of the tax credit
When a donation is made to a qualifying charity such as the TRU Foundation, the donor is entitled to claim a tax credit on their personal tax return. The tax credits reduce the amount of tax that the donor has to pay in a given year by reducing the federal and provincial taxes payable.
For the first $200 of donations being claimed, a non-refundable federal tax credit of 15% for 2011 will be granted. This means that the amount of federal tax payable will be reduced by $30. After the first $200 threshold is passed, any remaining donation amount being claimed on the tax return for that year will result in a non-refundable federal tax credit of 29%. Thus if an individual claims a total of $1,000 in donations, the first $200 will generate $30 in federal tax credits, while the remaining $800 will generate $232 in federal tax credits for a total of $262 in federal tax credits. Provincial taxes payable will also be reduced.
The net effect for taxpayers in all tax brackets is that the portion of the charitable donation in excess of the first $200 will result in a tax savings approximately equal to the top marginal tax rate.
Combining the elimination of the capital gain and the donation tax credit
When you donate a security with accrued capital gains, then you benefit from the elimination of the capital gain plus the donation tax credit. The combined tax savings can be quite impressive. The following example illustrates this point by comparing two alternatives for donating securities, assuming a Fair Market Value (FMV) of $50,000, an adjusted cost base of $10,000 and a tax rate of 43.7% applicable in British Columbia.
|Sell shares and donate cash||Donate shares directly|
|FMV of donation (a)||$50,000||$50,000|
|Adjusted cost base||$10,000||$10,000|
|Taxable capital gain||$20,000||$0|
|Tax on capital gain @43.7% (b)||$8,740||$0|
|Tax savings from donation tax credit (c)||$21,850||$21,850|
|Total cost of donation = (a) + (b) – (c)||$36,890||$28,150|
This example demonstrates that there are tax savings to be realized by donating publicly traded securities with appreciated gains as opposed to first selling the publicly traded securities and then donating the proceeds. This means it costs you less to make a donation of securities instead of a donation of cash. In this example, a savings of $8,740 ($36,890 – $28,150) is realized by donating the appreciated property instead of selling it and donating the proceeds. The difference is a direct result of the eliminated capital gains on the donated securities.
Other strategies to maximize the tax benefit of donations
Several strategies may be combined with the elimination of capital gains on donated securities to enhance the tax benefits.
Donate some shares to eliminate tax on sale of securities
If you sell securities with an accrued capital gain, then you will most likely trigger a tax liability on the taxable capital gain. Donating the securities may be one alternative to eliminate the taxable capital gain.
However, you may not wish to donate all the securities since you may want to reinvest the proceeds or use them for lifestyle expenses.In this case, you may want to donate a portion of your securities and sell the remaining portion.
The following table demonstrates the tax impact of selling the securities and keeping all the sale proceeds of $50,000 vs. donating $14,286 of securities and keeping the remaining $35,714 of sale proceeds:
|Sell Securities||Donate a portion and keep the remaining sale proceeds|
|FMV of securities (a)||$50,000||$50,000|
|Proceeds of disposition of securities not donated||$50,000||$35,714|
|Amount of charitable gift (*) (b)||$0||$14,286|
|Capital gain ($50,000 - $10,000)||$40,000||$40,000|
|Taxable capital gain||$20,000||$14,286 (**)|
|Tax on capital gain @43.7% (c)||$8,740||$6,243|
|Tax savings from donation tax credit (d)||$0||$6,243|
|Net tax liability||$8,740||$0|
|Net proceeds retained = (a) – (b) – (c) + (d)||$41,260||$35,714|
(*) The donation amount is equal to the proceeds of disposition for the securities donated
(**) 50% of the capital gain on securities not donated = ($35,714 – $7,143) x 50% = $14,286.
The ACB for the securities not donated is the prorated ACB as follows ($35,714/$50,000) x $10,000 = $7,143.
The information in this brochure does not constitute legal or financial advice and should not be relied upon as a substitute for professional advice. The TRU Foundation encourages you to seek professional legal, estate planning, and financial advice before deciding on a course of action.