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In-Kind Donations to Charities

Jon

POSTED BY

Jon Knutson

Financial Advisor and Associate Portfolio Manager

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With all that is going on in the world, gifting to those in need is top-of-mind right now. Cash gifts are the most common way to donate to charities - it’s simple and provides you with a tax credit.  However, it’s important to know that a cash donation may not be the most tax-efficient way to donate.  To demonstrate, let’s look at the following scenario:

Olivia has significant assets inside her non-registered account and has unrealized capital gains.  She would like to donate $10,000 to the Canadian Red Cross (Ukraine Humanitarian Crisis Appeal) from her investment account.  She wants to know if she should sell an investment that has appreciated significantly in value or if she should donate the investment in-kind?

The 2006 Federal Budget eliminated the taxation of capital gains on in-kind transfers of securities (e.g., stocks, mutual funds, ETF’s) for charitable donations.  For mutual funds and publicly-traded securities that have increased in value, 50% of the capital gain must usually be reported as income and taxed accordingly.  However, if they were donated in-kind rather than being sold, the capital gain reported is reduced to zero.

Sell Fund & Donate Proceeds
(Cash Donation)

Donate Fund In-Kind

Market Value of Shares

$10,000

$10,000

Adjusted Cost Base

$4,500

$4,500

Capital Gains

$5,500

$0

Taxable Capital Gains (50%)

$2,750

$0

Tax at 53.50%*

($1,471)

$0

Net cost of donation

$11,471

$10,000

*Olivia is in the top marginal tax bracket (in BC, over $227,092 income is 53.50%)

The donation amount received by the Red Cross (market value of the security donated) and the total tax credit would be the same whether the donation is made in cash or in-kind.  However, by donating in-kind, Olivia was able to avoid paying tax on her capital gain.  The example above yields an extra $1,471 in savings by donating in-kind to the charity compared to donating in cash.  It is important to have a strategy that maximizes your gift and minimizes your tax liabilities.



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