This is a follow-up to my earlier post on donating securities to charities. You can find the article here. In short, making a charitable donation using securities – such as shares of public companies – that have appreciated in value is a highly tax-efficient strategy. This article will go into greater detail about the tax implications of the strategy.
There are two types of tax benefits available in Canada. The first is a tax deduction, known to most Canadian investors through the RRSP. A tax deduction reduces a taxpayer’s income for the year, thereby reducing the amount of income tax she or he pays. This means that a tax deduction is also more valuable for higher earners, as due to the progressive tax system in Canada, tax rates climb as a person’s income increases. An Ontarian earning $40,000 who contributes $5,000 to an RRSP reduces his or her tax bill by about $1,000. An Ontarian earning $200,000 who contributes the same $5,000 to an RRSP reduces his or her tax bill by over $2,400 – well more than twice the benefit.
Charitable donations instead receive a tax credit, which is somewhat different mechanically from a tax deduction. A tax credit has a few key differences. First, a tax credit can only be used to offset taxes owing, and if there is no more tax available to offset, the credit expires worthless[1], however, tax credits from charitable donations can be “carried forward” up to 5 calendar years, so they can be saved until the credit would be more valuable. Second, tax credits are equally valuable regardless of the donor’s tax bracket. A taxpayer earning $500,000 receives much the same reduction in taxes payable as one earning $50,000. Third, the tax benefit depends on the donor’s province of residence, and in effect, two smaller tax credits are given – one for provincial tax, and one for federal tax.
In Ontario, for a person earning above $220,000 the formula works as follows for combined federal and provincial tax:
Tax credit value = 30% on the first $200 donated + 44% on donations beyond the $200 threshold
However, there are caveats to the above. In particular, the 44% credit is reduced to 41% if the person’s income is reduced to a level below $220,000 (that is, to a point below the highest marginal tax bracket). This would of course apply to donors with lower incomes and could also be meaningful for a person utilizing the carryforward provision and “cashing in” multiple years’ worth of tax credits in one tax year.
It is also worth noting that the above is the same regardless of donations of securities or cash. The elimination of the capital gain is an extra benefit over and above the tax credit earned for the donation either way.
The value of the tax credit varies on a few other factors as well. In particular, the province of taxation affects the value of the tax credit by impacting the provincial portion of the tax credit earned. Quebec, Alberta and Nova Scotia have the most generous credits, while Ontario and Nunavut and Yukon Territories have the least.
Donations of securities can also be made from corporate investment accounts, which works slightly differently and confers different benefits. While beyond the scope of this article, we are happy to discuss the mechanics with you.
Regardless of one’s province of residence or even income level, donation of appreciated non-registered securities is a very tax-efficient method of donating to charities. Most charities have the ability to receive donated securities in their investment account and are happy to coordinate the donation. We are proud to facilitate dozens of charitable donations annually on behalf of our clients. If you are interested in learning more, please contact us.
[1] Charitable tax credits can only be claimed up to 75% of a person’s income for the year, except in the year of the person’s death, in which 100% can be claimed instead.
