Charitable Giving Strategies

I often meet with families who are looking to save money on taxes, but also give to their favourite charities. Most Canadians who give money to charity usually do so by writing a cheque. But did you know there are other ways to give, that may provide more tax and estate planning benefits than simply giving cash. Let’s take a look at a great strategy that is available to you.

Donating Shares in Kind

In Canada if you have securities with a capital gain, you can donate these securities to charity, and you’ll pay no capital gains tax. All Canadians can take advantage of this strategy to save on taxes.

As a business owner, you have access to even more advantages if you donated corporately held securities. Let’s show you how this works. We’ll take Ron, he’s married with 3 adult children. He’s built up a successful heavy equipment sales business, owns multiple real estate, and also has a corporate investment portfolio. The value of the portfolio is $5M which he plans to give to charity. It has a cost base of $1M, so there will be a future tax bill.

Consider the following strategy: Ron has Corporate securities worth $5M, cost base of $1M. Let’s compare gifting these in kind to charity/donor advised fund vs. selling the shares and then gifting after the sale. What we want to compare is the after-tax cost of the donation in these two scenarios, to see which is more efficient and effective.

Scenario 1: Ron simply sells the shares and then donates the cash to charity

Ron sells his shares and realizes a capital gain of $4M. This gain is taxed at a Corporate tax rate of 66%, so taxable gain is $2,666,666. The approximate taxes owing are $1,333,333. As a business owner, Ron has a secret weapon that he can take advantage of – the Capital Dividend account. This is a notional account whose purpose is to keep track of certain tax-free amounts received by private corporations that would also be tax-free if received directly by the shareholder.

The tax-free portion of $1,333,333 is added to Ron’s Capital Dividend account. The value of CDA to shareholder (at 45% tax rate) is $600,000. The value of the donation deduction = $2,500,000. After tax cost of the donation is $3,233,333 ($5,000,000-$600,000-2,500,000) +1,333,333= $3,233,333

Scenario 2: Ron donates shares in kind to charity/donor advised fund

If Ron donates the shares, there is no tax. In this scenario his Capital gain of $4M is added to the Capital Dividend Account. Value of CDA to shareholder (at 45% tax rate)= $1,800,000 Value of donation deduction = $2,500,000.

After tax-cost of donation is ($5,000,000-1,800,000-$2,500,000) + 0= $700,000

By donating his shares in kind to charity, Ron’s after-tax cost of donating the shares is $2,533,333 less than if he sold the shares and donated the case.

This is a great way to give strategically, and save on taxes at the same time. Please reach out, if you think this could be of help to you.

Business Owners

The most overlooked area of financial planning for business owners and incorporated professionals is the lack of integration between corporate and personal assets. When the majority of your assets are in your corporation you need very specific, specialized and personalized financial advice.

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