The majority of people will agree that when you give to a cause that is important to you it makes you feel good.  Traditionally, most donations to charitable organizations have been done via donating forms of cash.  Others provide donations of unused goods or services on a pro bono basis. These methods of donating provide the donor with tax savings in addition to feeling good.

What if you could increase the amount of money you contribute to a charity while also reducing your own tax burden?

A relatively untapped method of contributing to charitable organizations is the transfer of securities held inside non-registered investment portfolios.  This method of charitable donation is available for both individual and corporate donors and can result in less tax being assessed on the donor and more dollars landing on the accounts of the charitable organization.

The transfer of securities as a method of charitable donation is best suited for those donors who have securities inside a non-registered investment portfolio that have appreciated in value or whose taxable income is near the $200,000 level. However, it is a viable option under any scenario.

Let’s take a quick dive into how all parties can make this a win-win experience.

Charitable Organizations

Charities need to be proactive to ensure they have the infrastructure in place to easily accept donations of securities.  This includes having an investment account established to facilitate the transfer, establishing a process through which the donor can advise the charity of its intent, ensuring the process includes an assessment of whether holding the particular security aligns with the mission of the charity and ensuring the donation meets the criteria established by the Canada Revenue Agency (CRA). Finally, the charity needs to ensure the donations are appropriately reported in their charitable receipts system to ensure donation receipts are produced for the donor.

Individual and Corporate Donors

As a donor, you will need to ensure the following CRA requirements are met:

  1. The security is listed for public trading on a designated stock exchange.
  2. The recipient of your donation is a Canadian registered charity or other qualified one.

You will receive a charitable donation receipt in the amount of the fair market value of the security on the date the transfer occurs in accordance with CRA requirements. You should inform the charity of your intent to donate securities and once they approve to accept the security they will provide you with their account details which can then be used by your investment team to complete the transfer.

The transfer of the security is reflected as a sale of investments from your investment portfolio which will be reflected in your annual reporting from your investment team.  CRA enables you to report this transaction as having no gain and thus you pay no tax on this transfer.  In addition, you will receive a charitable donation receipt for this transfer.

Reporting Implications for Individual Donors

Completion of Schedule T1170 from the personal tax preparation forms will enable the proper reporting and tax treatment for this donation. The disposal of the security will be reported as a nil taxable gain event and the donation receipt will be reported entitling you to claim charitable donation tax credits on your personal tax return.

This form of charitable giving can be part of your annual giving plan during your lifetime as well as documented to be carried out as per the directions specified to settle your will.

The end result in comparison to a cash donation is an increase in money in the hands of the charitable organization and increased tax savings in the individuals’ hands.

Reporting Implications for Corporate Donors

Completion of Schedule 6 from the corporate tax preparation forms will enable the proper reporting of the disposal of this security.  The completion of Part 9 on Schedule 6 will result in the disposal of the security being reported as a nil taxable gain event. The completion of Schedule 2 of the Corporate Tax Return will generate the proper reporting of the charitable donation deduction.

An added feature for corporations is the increase in the Capital Dividend Account for the non-taxable portion of the capital gain which can subsequently be paid out to shareholders on a tax-free basis upon filing the proper election with CRA.

In this manner, the company is able to donate the full market value to the charity without capital gain tax implications, obtains a full charitable donation deduction inside the company, and then gets an additional amount of money in the hands of the shareholders tax-free, equivalent to the non-taxable portion of the capital gain.

The end result in comparison to a cash donation is an increase of money in the hands of the charitable organization, increased tax savings for the corporation and the tax free portion of the gain still eligible to land in the hands of shareholders.

We encourage you to consult with your McCay Duff advisor to see if this might be a viable option for you.

For more information on this topic, please contact your McCay Duff advisor.

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