There are a wide variety of giving options for donors, from cash to publicly traded appreciated securities and other types of capital items. According to BMO’s survey, Canadians Want to Give, but What’s Holding Them Back?, the most popular way to give is by cash (for 87% of donors), and more than half (54%) volunteer their time. It’s worth noting that over one-third (35%) make donations in kind (such as appreciated securities), which may have tax implications for the donor.
Canada has one of the most generous tax systems for charitable giving, and with so many ways to give it is wise to seek professional advice. Research shows that half (50%) of wealthy Canadians admit they would like to talk with their financial advisor about the tax benefit of giving as part of their tax planning discussion, and almost half (49%) would like to use their financial and estate planning conversation to learn more about transferring wealth to people in need and charities. 4
Understanding the rules for donating assets can make a big difference when it comes to capital gains tax. Moreover, it opens up options for the form that such donations can take.
Here are some strategies for charitable giving to consider:
Donating publicly traded securities
If you are planning to make a charitable donation this year, consider this tax-saving strategy; especially if you’ve already determined that you will be selling some of your current investments to provide the cash to fund the donation. By donating securities directly to a charity, you may have an opportunity to reduce the tax you would otherwise have to pay on the sale of your investments. Although a donation of securities is considered a disposition for tax purposes, the taxable capital gain realized on a donated publicly traded security may be eliminated. Whether you donate cash or the securities directly, you will receive a tax receipt for the full value of your donation, regardless of the tax treatment of the capital gain.
The table below illustrates how this special incentive increases the impact of a charitable donation, when the property donated is a qualified security instead of the cash proceeds from the sale of a security.
This example assume the donor owns a security with a current value of $50,000 and a nil tax cost base. It further assumes that the capital gain realized on the sale is $50,000, and the entire proceeds are donated to a charity. In the first situation, the security is sold and the cash proceeds are donated. In the second situation, the security is donated directly to a charity. As the table shows, a donation of securities may be preferred over a cash donation of equal value, particularly if you have already decided to dispose of the securities during the tax year.8
Real estate or private company shares
There is no capital gains exemption for these donations but they are eligible for tax credits. This may be appropriate for business owners with a tax bill for appreciated property or private shares on the horizon. This is a more complex way of giving, and you should seek advice from a tax professional in order to do it effectively.
Private foundations vs. donor-advised funds
A private foundation allows a donor to make grants within CRA rules but it also carries the responsibility of administering that foundation. On the other hand, a donor-advised fund, which involves no administration by the donor, has less freedom and flexibility for the amounts the donor can grant because there may be limitations set by the public foundation that is holding the fund.
Many wealthy individuals want to involve their children in the act of giving and to leave a legacy for the next generation. They do this by supporting their favourite charities through charitable bequests in their will. Be sure to discuss this approach with family members and seek guidance on structuring it properly.
You need to understand the advantages and disadvantages of each approach and consider the specific circumstances before making a decision. Review your charitable plan with a financial advisor on a regular basis to ensure that your giving goals, target donation amounts and selected gift vehicles continue to align. – Marvi Ricker
Give with confidence
Clearly, there are many things to consider when making donations. So when the impulse to give strikes, give confidently by knowing and understating your giving options. Being philanthropic means giving for personal reasons or to match your values − rather than for tax benefits − yet it is still prudent to make these generous donations in a financially sound way.
4 The philanthropic conversation: A guide for professional financial advisors. Canadian Association of Gift Planners, 2016. Sponsored in part by BMO. cagp-acpdp.org
6 Based on an assumed top marginal tax rate.
7 Assumes individual is subject to the new top federal tax bracket, has made other donations of at least $200 in the year and has sufficient other income to avoid the limit on donation claim to 75% of net income (100% in the year of death), but does not qualify for the First-time Donor’s Super Credit (FTDSC).
8 Note that changes enacted in tax law originating from the 2011 federal budget have limited the tax benefits associated with a donation involving flow-through securities by restricting the exemption from capital gains tax on the donation of flow-through investments to the excess of the (cumulative) capital gains over the original cost of acquiring the flow-through investments. Please consult with your tax advisor for further details.
This publication is for informational purposes only and is not and should not be construed as, professional advice to any individual. Individuals should contact their BMO representative for professional advice regarding their personal circumstances and/or financial position. The information contained in this publication is based on material believed to be reliable at the time of publication, but BMO Wealth Management cannot guarantee the information is accurate or complete. BMO Wealth Management does not undertake to advise individuals as to a change in the information provided. It is intended as advice of a general nature and is not to be construed as specific advice to any particular person nor with respect to any specific risk or insurance product. The comments included in this publication are not intended to be a definitive analysis of tax applicability or trust and estates law. The comments contained herein are general in nature and professional advice regarding an individual’s particular tax position should be obtained in respect of any person’s specific circumstances. ® ”BMO (M-bar roundel symbol)” is a registered trade-mark of Bank of Montreal, used under licence. All rights are reserved. No part of this publication may be reproduced in any form, or referred to in any other publication, without the express written permission of BMO Wealth Management. BMO Wealth Management is the brand name for a business group consisting of Bank of Montreal and certain of its affiliates in providing wealth management products and services.