Corporations and individuals that donate publicly traded securities to registered charities receive significant tax savings. These tax savings are generally three-fold.
- No Capital Gain
If a taxpayer donates publicly traded securities which have appreciated in value, the taxpayer (an individual or corporate taxpayer) realizes no capital gain on the donation.[1]
- Charitable Tax Deduction
The taxpayer will be entitled to a charitable donation receipt for the full value of the securities donated. A corporation is entitled to a tax deduction,[2] whereas an individual taxpayer is entitled to a tax credit.[3]
- Full CDA
If a corporation has a positive capital dividend account (CDA), the corporation can pay tax-free capital dividends to shareholders up to the amount of the positive CDA. Simplified, CDA represents the untaxed portion (ie, 50 percent) of realized capital gains. Where publicly traded shares are donated by a corporation, the corporation is permitted to add 100 percent of the capital gain to its CDA.[4]
Example
John Doe has a holding company (“Holdco”) with a portfolio of publicly traded securities, which includes shares of ABC Inc. The shares of ABC Inc. have increased in value. John purchased the shares at $20 each and they are now worth $80. Holdco will donate $60,000 worth of ABC Inc. shares to a registered charity. The $60,000 donation will save Holdco approximately $29,700 in taxes.[5]
Holdco has a capital gain on the shares of $45,000 (60,000 – 15,000 [ACB]). Holdco is entitled to a charitable deduction of $60,000.[6]
The $45,000 capital gain on the ABC Inc. shares is added to Holdco’s CDA balance. This provides John Doe with the opportunity to later pay himself tax-free capital dividends up to $45,000. This represents $4,918.50 in future tax savings[7]
The total tax benefits to John and Holdco are $45,958.50 ($29,700 for the deduction + $11,340 saved on the capital gain tax + $4,918.50 from the tax-free capital dividend). The after-tax cost to John is $14,041.50 ($60,000 – $45,958.50).
The following shows the effective cost of making the $60,000 donation:
| Selling Securities and Donating Cash | Donating $60,000 of Securities | |
| Tax on Disposition | ||
| Capital Gain on sale of securities | $45,000[8] | $45,000 |
| Taxable portion of capital gain | 50% | — |
| Taxable capital gain | $22,500 | $0 |
| Tax on capital gain | $11,340[9] | $0 |
| Amount added to CDA | $22,500 | $45,000 |
| Donation Credit | ||
| Amount of donation | $48,660 | $60,000 |
| Tax savings from donation | $24,086.70 | $29,700 |
| Net tax savings | $26,545.95** | $45,958.50 |
| Net cost to donate $60,000 | $33,454.05*** | $14,041.50* |
* 60,000 – 29,700 – 11,340 – 4,918.50.
** 24,086.70 + 2,459.25
*** 60,000 – 24,086.70 – 2,459.25 (tax saved on paying $22,500 in tax-free capital dividends)
[1] Income Tax Act, RSC 1985, c 1 (5th Supp), subsection 38(a.1). Note that prior to May 2006, these donations were taxed at half the capital gains rate
[2] See paragraph 110.1(1)(a).
[3] See subsection 118.1(3).
[4] See (a.1) of the definition of CDA in 89(1).
[5] 60,000 * .495 (Combined Ontario and Federal tax rate for investment income earned by a general corporation in 2018).
[6] Paragraph 110.1(1)(a) provides the calculation which provides the amount of the deduction for the corporation. Generally, the corporation is limited to a deduction of 75 percent of the its net income for the year. The 75 percent can be increased to 100 percent when certain circumstances are met.
[7] This assumes that John’s only income in the year is the $45,000 in dividends. His marginal tax rate on ineligible dividends would be 10.93%.
[8] 60,000 – 15,000 (ACB) = 45,000
[9] Taxable capital gain of 22,500 (45,000 / 2) * .504 (tax rate for investment income earned by a CCPC in Ontario in 2017/2018).