Charitable donation planning for year-end
In order to produce a tax credit for the current year, your charitable donations must be made by December 31. Here's how you can plan your charitable giving in a way that's beneficial to the charity – and to you.
You and your spouse should pool receipts and have the higher-income spouse claim the credit. The tax credit for a couple jointly reporting $400 is, on average, 44% higher than if each spouse reports $200. The actual difference varies by province.
Did you forget to claim past donations? You can use receipts from the last five years. Similarly, you have until 2014 to claim a 2010 donation if you don't need the tax break this year.
Donate a security
The most tax-effective way to support a charity is to donate stock, mutual funds†, or other securities with capital gains. Ordinarily, if you sell the asset or transfer it to another taxable individual, one-half of any resulting capital gain is taxable. But if you transfer the assets to charity, the capital gains tax is waived.
You still qualify for a charitable tax credit based on the asset's fair market value.
Suppose you have $1,500 worth of mutual fund units for which you paid $1,000. If you donate the fund units to your favourite charity, your $500 capital gain is tax-free and you get a donation receipt for the full $1,500.
Here are two strategies that capitalize on donating securities to charity.
- Donate and buy back. You could donate securities you like and then replace them – likely at a higher price than you bought them. So, you donate your $1,500 in mutual funds, and then you buy $1,500 of the same mutual fund units. Not only do you have your investment back, but your cost of buying is now $1,500. If you sell or transfer the units in the future, this higher adjusted cost base will result in a lower taxable capital gain.
- Donate part of an investment. Suppose that you have a holding that is worth more now than when you bought it but that you no longer want to own. You could donate just enough of the investment to create a tax credit large enough to offset the capital gains tax due on the disposition of the remaining shares or units.
Many Canadians support U.S. charities such as public broadcasting stations and university alumni funds. You can claim a Canadian tax credit on U.S. gifts up to 75% of your net U.S. income, typically dividends received from stocks held directly or distributed by U.S. equity funds.
However you choose to make a charitable donation, remember that you are divesting yourself of assets. And any decision to sell investments should never be made solely on the basis of tax considerations.
These decisions should be made within the context of your overall financial plan and with qualified professional advice. Contact BlueShore Financial to work with an advisor and find out the best strategy for you.