Making a donation before December 31, 2019 not only benefits your favourite charity but also reduces your income taxes.
The amount of tax savings depend on whether you make a cash donation or a gift of assets, including the securities, artwork or real estate (referred to as “gifts in kind”).
Assume you are a B.C. resident and your income is less than $210,000. You make a $1,000 cash donation. On the first $200 of the donation, your tax credit is $40. On the next $800 of the donation you receive a tax credit of $365, for a total tax credit of $405 on the $1,000 donation. If you donate an additional $1,000, you receive the full credit of $458.
If you donate assets other than cash or “gifts in kind “ which include securities, artwork and real estate, the gift is determined to be the fair market value at the time you make the gift. This results in a capital gain as if you had sold the asset. When you donate capital property you can make an election to designate the value for the gift, between the cost and the fair market value. This allows you to determine how much of the capital gain you wish to trigger.
The beauty of donating publicly traded shares which include securities listed on the stock exchange, mutual funds etc. is that you are exempt from the capital gains tax.
What is the benefit of donating cash versus publicly traded securities?
Suppose you have securities with an original cost of $10,000. The fair market value now is $20,000. If you decide to sell the securities and donate the $20,000 to your charity, then you have to pay about $2,300 on the $10,000 gain.
Alternatively, if you donate the securities directly, you get the full value of the $20,000 donation and you avoid paying the capital gains tax of $2,300.
Should my corporation make the donation?
When you make a donation personally, you get a tax credit. If a corporation makes a donation, it is deducted like any other practice expense. If the corporation donates securities or other assets, a capital gain will be triggered. The non-taxable portion of the capital gain is added to the corporation’s capital dividend account which you then can withdraw tax-free from the corporation. You have to look at your own situation to see if you are better off to make the donation personally or through your corporation. With the low Small Business tax rate it may be more of a benefit to you making the donation personally.
Your PJ&A advisor would be delighted to help you to maximize the financial benefits of making a charitable donation.
