How to leverage your charitable donations
Katrina S. Yaworsky
Westcoast Wills & Estates
As you may know, charitable donations result in a tax credit. However, you may not know that there are ways to leverage your charitable donation.
Let’s look at an example in which you donate $50,000 to a registered charity. In order to make this donation, you withdraw funds from your investments in the stock market. You sell $50,000 worth of stock in your non-registered investment account, which has doubled in value since you first invested. Consequently, a capital gain of $25,000 is triggered.
The government taxes 50 per cent of the capital gain, meaning that half of $25,000—or $12,500—is added to your taxable income. Although you donated $50,000 to the charity, you still have to pay income tax on $12,500 at your marginal tax rate (or $5,000 in tax using a 40 per cent marginal rate). In effect, it cost you $55,000 to donate $50,000 to a charity, although a credit will be received.
There is a way to leverage the donation, receive a tax deduction, and avoid capital gains all at once…which brings us to scenario two.
You decide to donate shares-in-kind to the charity by gifting $50,000 worth of actual shares. As a result of your donation, you receive a tax deduction for the fair market value of the shares at $50,000. Even better, no capital gains are payable on the increase in value of the donated shares, therefore the entire tax credit can be applied against your other income. Better still is that as soon as the gift is received by the registered charity, the charity can then sell the stock at its current value of $50,000, without tax consequence. This strategy takes some pre-planning, but it’s certainly worth the benefits.
It’s worth noting that the tax benefits applicable to gifts-in-kind will apply whether property is gifted during someone’s lifetime or upon their death. As a result, such gifts can be made through a person’s Will and their estate will receive the taxable benefit.
Westcoast Wills & Estates provides comprehensive estate planning including Wills, trusts, powers of attorney, representation agreements and committeeship.
The catch is that only specific types of property won’t incur the capital gain, such as publicly traded securities and certain ecological gifts. In addition, there are strict time limitations that must be met to receive the associated benefit if the gift is made through a Will. To learn about leaving a donation during your life or in your Will, speak with an experienced wills and estates lawyer today.
This article is intended to be legal information, not legal advice. If you wish to structure your estate plan to maximize benefits from charitable donations, you should work with an estate planning professional on a plan that works best for you.