Leveraging Charitable Donations

Peter Dolezal

In a typical year, most of us will make modest donations to multiple charities.

Occasionally however, we may find ourselves in the fortunate position to be able to make a particularly significant contribution to a single charity, such as a local Hospital Foundation.

The trigger may be the receipt of a significant inheritance, a recent business windfall, or simply the fact that we are at an age when we prefer to begin moderating projected estate value.

Let’s assume we wish to donate $10,000 to a charity, perhaps in memory of a loved one. Most donors would take funds from a savings account and write a cheque for the $10,000. There is often a better solution.

If, for instance, we have a Non-Registered Investment account in which we hold equities with substantial embedded and unrealized capital gains, we may be able to not only donate our planned $10,000, but also obtain both a tax deduction and completely avoid the capital gains tax. To Illustrate The donor’s Unregistered investment portfolio holds a significant value

…we may be able to not only donate our planned $10,000, but also obtain both a tax deduction, and completely avoid the capital gains tax.

in Royal Bank stock. Since purchased, the stock has doubled in value. • If the donor were to sell $10,000 of stock to cover the donation, it would trigger a capital gain of $5000. That would result in $2500 being added to taxable income. • At tax time, about $1000 tax would be owed (assuming 40 per cent marginal tax). • In effect, it would have cost the donor approximately $11,000 to generate the $10,000 required for the donation.

The better solution: Instead of selling RBC shares, we elect to donate actual shares with a current market value of $10,000. The result? a) We receive a $10,000 tax deduction. b) We do not trigger the embedded capital gain on the donated shares. c)

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The registered charity can immediately sell the shares for the full $10,000 value, without tax consequence.

If, on the other hand, the RBC shares were held in a TFSA, knowing that TFSAs are tax-exempt, the temptation might be to sell $10,000 in shares and write a cheque to the charitable organization. That is not a good approach for a couple of reasons. a)

The donor misses out on sheltering the capital gains in the taxable Non-Registered account.

b) Since all growth within a TFSA is perpetually tax-free, it should never be drawn upon if a Non-

Registered account is available.

It is always to an investor’s benefit to minimize holdings in a taxable account (Non-Registered) in favour of preserving maximum holdings in a tax-free TFSA.

This share-donation strategy is applicable to charitable donations of any value. From a practical standpoint, it is best reserved for major charitable giving. s Peter Dolezal is an Independent Financial Consultant, selling no products. He is the author of a number of books; his most recent is the Third Edition of The Smart Canadian Wealth-Builder.