Charitable giving provides an opportunity to create significant tax savings while simultaneously helping others by contributing to registered charities of your choice. You probably already know that governments provide corporations with tax deductions for charitable donations to encourage philanthropic giving, but did you know that it is possible to generate even greater savings by donating publicly traded securities and mutual funds through a corporation?
Personal Vs. Corporate
Both individuals and corporations are eligible for tax savings when donating to a registered charity. A charity must be registered with Canada Revenue Agency to issue eligible donation receipts, and the registration number must appear on the receipts themselves.
The amount of the tax receipt is equal to the fair market value of the gift received. This reduces the corporation’s tax obligation by lowering its taxable income. It’s important to note that charitable donations are capped at 75% of net income each year, with excess credits carried over for a maximum of five years.
Cash Vs. In-Kind
From a tax standpoint, there are two benefits when donating investments instead of cash, and a third benefit when donating from a corporation. Let’s break it down.
Most people are familiar with giving cash to charity, which is often accomplished by liquidating investments first and donating cash from the proceeds. In doing so, the transaction results in a capital gain if the investment has appreciated in value. The capital gain is determined by the difference between its Fair Market Value (FMV) and its Adjusted Cost Base (ACB). Currently, 50% of the capital gain is taxable and 50% is tax-free. For corporate investments, the 50% tax-free component is tracked against the Capital Dividend Account (CDA) and may also be withdrawn tax-free from the company later.
Now for the good news. In contrast, when donating publicly trading securities ‘in kind’ instead of cash, the capital gains inclusion rate on those securities will be zero under our tax code. Put simply, you do not pay any capital gains tax on your donated investment, which can lead to remarkable tax savings. In addition, a donation receipt for the full market value of the donated securities is yours to keep. Now, let’s take a closer look at the third benefit of donating through a corporation.
An Example Perspective
Dr. Howard Smith’s Dentistry Professional Corporation holds a portfolio of publicly traded securities. Howard is looking for a way to save tax and give back to a charity in his community. After investigating options to accomplish his objective, Dr. Howard decides to donate $50,000 of securities through his corporation.
One particular security held within the company is ABC Inc., which has appreciated in value from when it was purchased at $10 per share. Today, they’re worth $50 per share, resulting in a $40,000 unrealized capital gain. If Dr. Howard liquidates the shares first, then donates cash, his corporation will pay capital gains tax in the amount of $10,000. However, by donating securities in-kind, the capital gains inclusion rate is zero, therefore, the corporation pays no tax. Moreover, the full $50,000 value of the donation will qualify for a 50% tax deduction, thus resulting in saving $25,000 for Dr. Howard’s corporation.
Dr. Howard further benefits from the credit that accrues to the Capital Dividend Account. Normally, any withdrawal of the investments would be treated as an eligible dividend and taxed up to 40%. In this case, because Dr. Howard donated securities, the CDA account is credited $40,000 to reflect the full portion of the capital gain.
Dr. Howard is very happy that he can immediately see his tax benefits and charitable donations come to fruition. His original $50,000 donation of securities only cost him $9,000, while also paying himself a tax-free capital dividend of $40,000 from his corporation.
In summary, it can be more tax-effective to donate securities in-kind rather than in cash, and it is even more beneficial when donating from within a corporation. Please contact TMFD Financial to learn more about tax-effective charitable giving strategies. Call our team at (866) 551-3707, today.
TMFD Financial offers accounting, financial planning, and consulting services for dentists through one convenient point of contact. Their integrated team of proficient financial professionals work together to synchronize all the moving parts of a dentist’s personal and professional finances. All tax and accounting services provided by TMFD Professional Corporation, Chartered Professional Accountants.