If someone is donating appreciated property in-kind to reduce their taxes payable for this year, it’s important to do so well before the end of the year.jadamprostore/iStockPhoto / Getty Images
Canadians who enjoyed big gains on their investments this year and are interested in charitable giving should consider the tax advantages of donating securities in-kind rather than in cash.
Donating appreciated publicly traded shares and stock options, exchange-traded funds, mutual funds, segregated funds or certain other types of capital property to a registered charity allows taxpayers to claim a donation tax credit (DTC) and eliminate the taxes they would otherwise incur on the capital gains realized when they sell the property.
“It’s one of the biggest [tax] advantages you can get,” says Guerlane Noël, assistant vice-president, tax and estate planning, at Mackenzie Investments in Montreal.
Here’s how it works:
When someone donates to a registered charity (or other qualified donee), they receive a tax receipt for the value of the donation, which they can then use to claim a DTC either in that taxation year or any of the next five.
The federal DTC rate is 15 per cent on the first $200 of donations and 29 per cent (33 per cent if the taxpayer’s income exceeds $253,414) on amounts above. When combined with provincial and territorial credits, the top DTC rate ranges from approximately 45 to 55 per cent, depending on where the taxpayer lives.
The DTC, on its own, represents a potentially generous tax break for donors.
Consider an Ontario taxpayer with $275,000 in taxable income who owns $100,000 in publicly traded shares of ABC Co., which they originally bought for $60,000.
If they sell the property and donate the $100,000 in cash proceeds to a registered charity, they can claim a combined DTC of about $41,250.
On the other hand, the taxpayer will have to pay about $10,700 in taxes on the $40,000 in capital gains realized on the sale of the shares.
However, if the taxpayer donates the ABC Co. shares in-kind, they still get the $41,250 DTC, and they also get a 0-per-cent inclusion rate on the capital gains realized on the deemed disposition of the property, thereby eliminating the $10,700 in related taxes.
Planning in-kind donations
If someone is considering donating appreciated property in-kind to reduce their taxes payable for this year, it’s important to do so well before the end of the year to ensure the transfer of property is processed in the current year.
“We can’t just wake up on Dec. 31 and say, ‘Okay, I’m going to go with that strategy,’” Ms. Noël says. “By the time the transfer happens, it’s going to be 2026. We won’t lose the [donation] tax credit, but we are losing the opportunity to use it in 2025.”
Keep these other factors in mind when considering a charitable donation or gifting property in-kind:
Check with the charity: Not all charities are positioned to accept donations in-kind.
Annual limit: Most Canadians can claim a DTC on up to 75 per cent of their income in a year. (In Quebec, the limit is 100 per cent). In the year of death, the limit increases to 100 per cent of the deceased’s income, and if there’s excess DTC, up to 100 per cent of income in the year before death.
AMT: A person making a large donation and claiming the DTC in the same year they realize significant capital gains, earn significant dividend income, or claim credits or deductions, may be subject to alternative minimum tax (AMT), a parallel method of calculating tax that ensures high earners pay at least a minimum rate of tax each year.