I'm planning to make a donation of $10,000 to a local charity, either with cash or securities. My adviser is happy with the current balance in my portfolio and doesn't think we need to sell anything. However, I suggested that I could donate securities to take advantage of the tax break on capital gains and then use some of the cash in my account to repurchase the shares to keep my investment mix the same. Do you see any flaws in this approach?
Donating listed securities that have appreciated in value is a win-win. The charity receives funds to spend on worthy causes, and you get a donation tax credit and – thanks to a further tax break on in-kind donations of listed securities – avoid capital-gains tax on any appreciation in the value of the shares. Even though this tax relief on capital gains has been available since 2006, many investors aren’t aware of it.
“Donating securities ‘in-kind’ is perhaps the most missed opportunity in charitable giving,” says Jamie Golombek, managing director,for tax and estate planning with Canadian Imperial Bank of Commerce.
“I call it ‘tax-gain donating,'” Mr. Golombek says. “While most of us might be more familiar with the concept of tax-loss selling, which involves crystallizing a capital loss so it can be used to shelter capital gains, tax-gain donating involves crystallizing gains on winning stocks or mutual funds by donating them ‘in-kind’ to charity.”
Here’s how it works. Say you plan to donate $10,000 of shares that have an adjusted cost base of $2,000.
If you were to sell the shares first and donate the cash, you would have to pay tax on the $8,000 capital gain. Assuming your marginal tax rate on regular income is 50 per cent, you’d pay capital-gains tax of 25 per cent – or $2,000.
But if you instead donate the $10,000 in shares, no capital-gains tax applies.
What’s more, in both cases you would also receive a charitable donation receipt for $10,000. Depending on the province or territory, your gift would produce a charitable donation tax credit worth at least 40 per cent, or $4,000. (This assumes you have already made $200 in charitable donations, as the charitable tax credit is significantly higher above this threshold.)
Wondering how large your tax credit would be? The federal government has an online charitable donation tax credit calculator. The government also maintains a database of charities and other qualified donation recipients that can issue official receipts. Find it here.
Here a couple of things to keep in mind. Only listed shares (or other eligible securities such as listed bonds or fund units) that are held in a non-registered account can be donated. You may claim the entire donation credit in the current year, or spread it over the next five years. “You would only do this if you are caught by the donation-income limitation, which generally limits donations in a year to 75 per cent of your net income, which is not a problem for most of us,” Mr. Golombek says. Either way, the charity receives the full value of the gift immediately.
Regarding your plan to repurchase the securities in your account, it makes perfect sense, Mr. Golombek says. “You get the donation tax receipt, pay no tax on the capital gain to date and increase the adjusted cost base of the securities back up to their current fair market value, reducing your ultimate tax bill on a future sale,” he says.
A poor investment has led to a capital loss in my account. I currently don’t have any capital gains to offset. Can I sell some of my dividend stocks for a capital gain but then immediately repurchase them? This would reset the adjusted cost base on my stocks and make my future tax planning simpler. I know there is a required 30-day waiting period when selling for a capital loss but is there any restriction on repurchasing shares that were sold for a capital gain?
You could certainly do that, as there are no restrictions on repurchasing shares that were sold for a capital gain. But there’s no benefit in doing so, Mr. Golombek says. “Since the capital loss can be carried forward forever, with no expiry date, you will never lose it and always be able to take advantage of that in the future when you sell the dividend stocks for a capital gain,” he says.
My son unexpectedly died at 46 years old in July. He made his sister the beneficiary of his registered retirement savings plan. Is there anything we can do with the money to minimize the income tax on it?
“First, I’m so sorry hear of the loss of your son,” Mr. Golombek says. “Unfortunately, there is no preferential tax planning available when assets or registered plans are left to a sibling. The fair market value of the RRSP as of the date of death will be included in income on your son’s terminal tax return. Special rules only apply when there is a surviving spouse or partner and in very special cases, when registered plans are left to minor dependent children or children with a disability."
E-mail your questions to firstname.lastname@example.org.