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.