Q: Is it true that I can lower my tax bill by donating some of my investments to charity?
A: If one of your goals this year is to donate to charity, you may want to consider donating an investment directly instead of cashing it out first.
Any donation (whether cash or investments) will get you donation tax credits that can be used to reduce your tax bill, says Jamie Golombek, managing director of tax and estate planning at CIBC. Between federal and provincial tax credits, Golombek says most Canadians will get a minimum of 40 per cent for donations above $200 annually.
Donating an investment (known as donating in kind) that’s gone up in value means you save capital gains tax, potentially making more money available to the charity.
In-kind donations may allow you to avoid paying capital gains tax on any accrued gain on the investments you donated, Golombek says. The Income Tax Act states that if you donate appreciated publicly traded securities, mutual funds or segregated funds to a registered charity, your capital gain is considered zero for tax purposes.
Let’s say you bought shares for $333 and now they’re worth $1,000. That’s a gain of $667. If you sell those shares and your tax rate is 33 per cent, you would have to pay around $110 in capital gains tax on 50 per cent of the profit, leaving you with $890 after tax. If you donate the shares directly instead, you don’t have to pay capital gains tax, which means you would get a donation receipt for the full $1,000.
“By donating appreciated investments to a registered charity, you’re avoiding the capital gains tax, and getting a donation tax credit that can reduce tax on your other income,” Golombek explains.
You can also consider donating investments that have dropped in value to charity to get a charitable donation tax credit for the fair market value of the shares and trigger a capital loss that can be used to offset any capital gains you’ve realized.
You can carry losses back three years or carry them forward indefinitely to offset previous or future gains. Just be sure to wait at least 30 days after selling before repurchasing the same securities so that the loss is not denied under the superficial loss rules — and note the rule also applies to purchases made 30 days before the sale.
If you donate publicly traded securities, mutual funds or segregated funds to a registered charity, you’ll need to fill out form T1170 (capital gains on gifts of certain capital property) with your income tax return.
Keep in mind that you can only claim donations up to 75 per cent of your annual income. If you’ve donated more, you can carry the excess amount forward for five years.
If you’re not sure whether this strategy makes sense for you, speak to a tax professional who can look at your circumstances and provide advice.
Money Coach is a biweekly feature that helps Canadians find helpful solutions to personal finance challenges. If you have a question, email Lora at [email protected].
