Submitting your 2020 taxes may get you thinking of how to most effectively make your charitable donations in 2021. The federal government gives tax credits of 15% on the first $200 of charitable giving and 29% for anything over $200 annually. This applied with a various provincial rate can add up to a significant tax credit at the end of each year. “Tax Gain Donating” is often underutilized but is a great strategy to make the most of your charitable donations and reducing your tax burden on any of your winning investments this year.
What You Need to Know
Tax Gain Donating simply means donating securities in kind to registered charities instead of just giving them cash. This can be a fantastic opportunity for individuals with unregistered money that has accumulated capital gains in the past year. By donating the securities in kind, the donor will receive a tax receipt for the FMV of the gift all the while dodging the tax that would otherwise be due at the end of the year. The donor can then use, if they wish, the cash that they would have otherwise donate to repurchase the same investment on the open market. This is a great advantage as the newly purchased securities will have a much higher ACB then the recently donated ones.
Here is an example of how it works:
An investor wishes to donate $10,000 to their favorite charity. The same investor also has an investment with an FMV of $10,000 and an ACB of $2000 that they will have an $8000 capital gain on this year. Their tax advisor suggests donating the investment in kind to the charity instead of investing the cash. If the donor decided to donate the $10,000 in kind, they would receive a tax receipt for $10,000 from the charity. They would also avoid paying the capital gain that would have otherwise been triggered that year. Since the investment that was donated was performing so well, the investor decides to buy back the investment with the $10,000 cash they were going to use for their charitable donation. Now they have the same investment, with an ACB of $10,000 instead of $2000.
As you can see, the investor in the above example saved themselves a significant tax bill while still making a donation to the charity they wish to support as well as putting themselves in a good position for the upcoming investment year.