It is the time of year when we start to think about ways to minimize income tax. One easy way is to donate to registered charities. The Canada Revenue Agency (“CRA”) and Revenu Québec provide generous incentives for such donations. Individuals are entitled to a credit against their taxes and corporations may reduce their income for tax purposes by the amount of the donation.
Did you know that additional tax benefits are available if publicly traded shares with unrealized capital gains are donated instead of cash? Donating shares entitles you to the tax benefits of a donation based on the fair market value of the shares at the time of the donation but the unrealized gain itself is exempt from tax.
As well, if a corporation is the entity donating the shares, the entire amount of the gain is eligible to be paid to the shareholders on a tax-free basis.
The following tables illustrate the benefits of donating shares as opposed to cash by both individuals and corporations.
Individual Donation
Mr. Smith is an individual contemplating donating $100,000 to his favorite charity. He owns shares of a public company with a value of $100,000 that originally cost $20,000. He is a Quebec taxpayer with $200,000 of other income and is paying tax at the highest marginal rate of 53.31%. He can choose to either sell the shares, pay tax on the gain and make a cash donation of the after-tax proceeds or he can donate the shares directly. The following table illustrates the net tax effect of each scenario.
| Mr. Smith |
Scenario A Share Donation |
Scenario B Cash Donation |
||
| Fair market value (“FMV”) of donated shares | $100,000 | $100,000 | ||
| Adjusted cost base ("ACB") of donated shares | $20,000 | $20,000 | ||
| Capital Gain | $80,000 | $80,000 | ||
| Inclusion rate | 0.00% | 50.00% | ||
| Taxable capital gain | - | $40,000 | ||
| Personal tax liability | ||||
| Additional income subject to tax at highest tax rate | $200,000 | $200,000 | ||
| Taxable capital gain | - | $40,000 | ||
| Taxable Income | $200,000 | $240,000 | ||
| Combined Corporate Income Tax Rate | 53.31% | 53.31% | ||
| Combined personal Federal and Quebec tax | $106,620 | $127,944 | ||
| Less: Donation tax credit | (58,703) | (46,175) | ||
| Net personal tax liability | A | $47,918 | B | $81,769 |
| Net tax savings on donation of shares vs cash | (B - A) | $33,852 |
He can actually save $33,852 by donating the shares directly.
Corporate Donation
Mrs. Simard owns all of the shares of ABCco which, in turn, owns shares of a public company valued at $50,000 that cost $10,000. ABCco has investment income from other sources of $100,000 and pays tax of 50.17% on its investment income. The following table illustrates the net tax effect of each scenario.
| ABC Company Inc. |
Scenario A Share Donation |
Scenario B Cash Donation |
||
| Fair market value (“FMV”) of donated shares | A | $50,000 | $50,000 | |
| Adjusted cost base ("ACB") of donated shares | $10,000 | $10,000 | ||
| Capital Gain | $40,000 | $40,000 | ||
| Inclusion rate | 0.00% | 50.00% | ||
| Taxable capital gain | B | - | B | $20,000 |
| Corporate tax liability | ||||
| Investment income form other sources | $100,000 | $100,000 | ||
| Taxable capital gain (B) | - | $20,000 | ||
| Net Income for Tax Purposes ("NIFTP") | $100,000 | $120,000 | ||
| Deduct: charitable donations (limited to 75% of NIFTP) | (50,000) | (39,967) | ||
| Taxable Income | $50,000 | $80,033 | ||
| Combined Corporate Income Tax Rate | 50.17% | 50.17% | ||
| Corporate Tax Liability | $25,083 | $40,150 | ||
| Tax savings on capital gains tax exemption | $10,033 | N/A | ||
| Tax savings on charitable donation deduction | $25,083 | $20,050 | ||
| Total tax savings | $35,117 | $20,050 | ||
| Addition to capital dividend account | $40,000 | $20,000 |
ABCco can actually save $15,067 by donating the shares directly. As well, ABCco can pay $40,000 to Mrs Simard as a tax-free capital dividend as opposed to only $20,000 if the shares are sold and a cash donation is made.
Under the right circumstances, if you are contemplating a large donation, either personally or through a corporation, the numbers show that it can make sense to arrange a donation of public company shares.
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Still have questions about public share or other types of donations? Please feel free to contact one of our Tax team members.
