Canadian entrepreneurs make millions of dollars in donations to a wide range of charitable organizations each year. What many don’t realize is that giving back can have some very positive tax implications. But before we get into the details, let’s examine a few interesting facts.
Did you know that according to the Canada Revenue Agency there were:
- Approximately 87,000 registered charities operating in Canada as at December 31, 2013
- 7 million individuals who made charitable donations out of 25.5 million individuals who filed their tax returns that same year
- $8.6 billion of allowable charitable donations and government gifts claimed by Canadian individuals during the 2012 tax year, resulting in $2.6 billion in donation tax credits
In addition, donations accounted for 0.75 per cent of total income reported by Canadian individuals during the 2012 tax year. These figures prove that Canadians are generous when it comes to charitable contributions. But it’s important for entrepreneurs to understand the tax implications of the donations made, both under current and proposed laws.
With that in mind, here are a few of the many beneficial tax implications of making charitable donations that every entrepreneur needs to know:
Capital gains exemption:
- Real estate and private shares—Under amendments proposed by Federal Finance Minister Joe Oliver in the 2015 Federal Budget, a new capital gains exemption was introduced and is available for individuals and corporate donors on dispositions of real estate and private shares. One of the conditions, among other restrictions, is that these assets are sold to an arm’s length party and proceeds donated to a registered charity within 30 days of the disposition. These measures “will apply in respect of dispositions occurring after 2016.” As an example, assume that you want to make a $500,000 donation in 2017 that is equal to the fair market value (FMV) of a property you acquired in the past for $100,000. Let’s also assume that your top marginal tax rate is 46 per cent. If you sell the property for $500,000 cash and donate that cash within 30 days of the sale, then you will avoid paying tax of $92,000 on the otherwise taxable gain. That’s in addition to the credit you will receive for the $500,000 donation.
- Publicly traded securities—Publicly traded securities, debt obligations, or rights listed on a designated stock exchange will qualify for a charitable tax receipt equal to the full FMV of the property disposed of with no tax on the capital gain realized. You must donate the stock and not the proceeds from sale of the stock. Tax savings will be at your marginal tax bracket multiplied by one half of your capital gain.
Tax credits—Twenty-nine per cent federal and 11 per cent Ontario non-refundable tax credits are available on donations made over $200, respectively. However, the effective tax effect will be 46 per cent on donations made once all other provincial surtaxes are factored in and considered.
When and how much to claim – You do not have to claim the donation in the year it is made. It might be beneficial to carry it forward and use it over the next five years. You can claim charitable donations made up to 75 per cent of your net income, and this percentage can be increased under certain circumstances.
Gifts in kind – A charity can issue a donation receipt for any personal-use property (such as a car, boat, furniture, camera, cottage primarily held for personal use and not rental income, etc.) and listed personal property (such as a print, etching, drawing, painting, sculpture or other similar work of art, jewelry, a rare folio or manuscript or book, stamp, and coin) that is donated. The amount of the receipt will be equal to the FMV of the donated item. In determining FMV, appraisers, dealers, and other people who are knowledgeable about the particular objects can provide appraisals for income tax purposes. Sometimes, you may need to get one or more appraisals to establish the FMV.
Insurance policies – If you have an insurance policy that you no longer need, consider gifting the policy instead of cancelling it. The donation receipt received will be equal to the FMV (determined by an actuary) of the insurance policy. That means you will save personal taxes on gifting the policy and on any further insurance premium payments made thereafter, which are also treated as donations.
Vazken Izakel, Partner