When you donate to a charity that works towards a cause you support, you always want to give the maximum amount. The first thought that comes to mind is to give cash, write a check, or swipe your credit card. Donating your taxable income might generate a donation tax credit, but it may not be the most efficient form of donating for you or the charity you support. It may come as a shock, but donating publicly traded mutual funds, ETFs, or stocks whose fair market value (FMV) has increased can generate more value for you and the charity. This article will evaluate the value of cash, in-kind donations, and tax benefits to help you determine a better option.

How Taxes Work for Cash Donations

When you make a cash donation of $200, you receive a 15% federal tax credit. For donations above $200, you receive a 29% federal tax credit. The highest tax credit you can get is 33%, up to a portion of your income, which falls under the 33% tax bracket. In cash donation, you only get a tax credit up to 75% of your net income and 100% of your net income in the year of death.

Let’s take an example. Mary falls under the 26% tax bracket. Three years ago, she purchased shares worth $10,000, but their value increased to $14,000. She sells the shares and gives the entire amount to charity. This is not tax efficient, as the $4,000 capital gain will be subject to capital gain tax.

As per the proposed changes, 66.6% of capital gain above $250,000 realized after June 25, 2024, will be taxable as per the marginal tax rate. Below $250,000, 50% of the capital gain will be taxable.

  • Mary will pay a $520 capital gain tax (26% tax on $2,000 capital gain).
  • Since she donated to a registered charity, she will get a tax credit of $1,132 (15% on $200 and 29% on the remaining $3,800).
  • Mary receives a net tax benefit of $582, reducing her donation cost to $9,418 ($5,000 cost of shares—$582 tax benefit).

How Taxes Work for Donations In-Kind

Let’s change Mary’s transaction and convert the donation from cash to in-kind. Mary directly donates the shares worth $14,000 to the charity, and the charity gets the same amount. However, things change drastically for Mary.

  • As the shares were donated to the charity, she gets the $1,132 tax credit on the $14,000 donation.
  • The entire capital gain is exempted from the tax, which means Mary saves $520 in capital gain tax.
  • Her net tax benefit is $1,132, reducing her donation cost to $8,868 ($10,000 cost of shares—$1,132 tax benefit).

Mary can use these tax savings to give more donations.

Donating Securities to Through Holding Companies

An even better option is if Mary has a holding company or a private corporation. She can give donations through her company. In this scenario, Mary will get:

  • $1,132 tax credit on the $14,000 donation
  • Tax exemption on $4,000 capital gain  
  • The $4,000 capital gain can be allocated to the capital dividend account (CDA). Shareholders (Mary) can withdraw dividends from the CDA tax-free.
  • Her donation cost is $4,868.

You still have time to take advantage of the tax benefits of donations. The federal government has extended the deadline for making eligible donations for the 2024 tax year until February 28, 2025.

Contact Black and Gill LLP in Toronto to Help You with Tax Planning

Talk to a professional tax expert to help you maximize your donations. At Black and Gill LLP, our accountants and tax experts can provide services such as tax filing and tax planning. To learn more about how Black and Gill LLP can provide you with the best tax expertise, contact us online or call us at 416-477-7681.