Month of Giving (Part 3): Donation of Securities

Dec 21, 2022

You May Also Like…

I Just Called to Scam You

I Just Called to Scam You

How to determine if it’s CRA on the line. Over the past few years, scam phone calls from individuals claiming to be...

Instead of liquidating securities to fund donations, it may be more tax efficient to donate securities directly to charitable organizations.

If you sell a security to obtain cash to donate, you generally need to pay tax on the profit earned, also known as a capital gain.

When a security is disposed of for proceeds greater than its original cost , a capital gain is ‘realized’. The capital gain is calculated as the proceeds received on the disposition less the cost it was acquired at.

Typically, there is capital gains tax levied against 50% of the realized gain.

However, gains realized on the donation of securities are exempt from tax, regardless of whether the securities are donated using corporate funds or personal funds.

Therefore, if you donate a security, you do not need to pay tax on the unrealized capital gains when you dispose of it.

*The donation of securities has beneficial tax treatment only to the extent that the securities have unrealized gains.

Summary of Benefits:

 

No personal or corporate tax on the unrealized gain.

When you donate securities with unrealized capital gains to an organization, you do not need to pay tax on unrealized gains prior to making the donation. This means you can give the entire value of the security to the charity without of giving a portion to Canada Revenue Agency first.

No tax levied on the charity for the unrealized gain.

Charities are generally tax exempt. As a result, the unrealized gain is never taxed, and the charity gets the full benefit of the entire fair market value of the security.

100% of gain added to the Capital Dividend Account.

When you donate directly from a corporation, the capital gain contributes twice as much to the Capital Dividend Account (described in more depth below), allowing for the extraction of double the amount of tax-free dividends from the corporation.

 

Donation of Securities from Personal Funds (Top Personal Tax Bracket)

 

Donate Shares Directly Sell Shares & Donate Cash
Proceeds (Value of Donated Securities) A $10,000 $10,000
Cost $2,000 $2,000
Gain (Proceeds – Cost) $8,000 $8,000
Taxable Gain (Gain * 50%) Nil $4,000
Capital Gain Tax (Taxable Gain * 50.4%) B Nil $2,016
After Tax Funds Available to Donate (A-B) $10,000 $7,984

*50.4% is the highest tax rate in MB.

 

Securities Cash
Donation $10,000 $7,984
Tax Savings (From Donation Tax Credit) (4,991) (3,975)
Total Effective Cost of Donation $5,009 $6,025
Benefit to donating Securities instead of Cash ($6,025 – $5,009) $1,016

 

As shown above, donating securities directly can increase tax savings and reduce the overall cost of the donations.

 

Donation of Securities from Corporate Funds

 

Donating securities that have unrealized gains from a medical corporation can have additional advantages.

The medical corporation has a tax account called the ‘Capital Dividend Account’ or ‘CDA’. The non-taxable portion of gains are added to the value of the CDA. A positive CDA balance can be paid out as a tax-free capital dividend to shareholders.

Usually, 50% of a capital gain is taxable and the remaining non-taxable portion, also 50%, is added to the CDA.

When you donate securities with unrealized gains, none of the gain is taxable, and therefore, the entire gain is the non-taxable portion. This amount is all added to the CDA, which allows you to take out twice the amount of tax-free dividend.

 

Donate Shares Directly Sell Shares & Donate Cash
Proceeds (Value of Donated Securities) $10,000 $10,000
Cost $2,000 $2,000
Gain (Proceeds – Cost) $8,000 $8,000
Taxable Gain 0% 50%
Added to CDA

(Non-Taxable Portion of Gain)

$8,000 $4,000

 

Under this scenario, no corporate tax would be payable on the direct donation of the shares to the charity and an additional $4,000 would be added to the CDA balance to be withdrawn tax-free in the future.

Physicians are often in the highest tax bracket, so an additional $4,000 of tax-free money would save ~$4,000 in tax, if the amount would otherwise be drawn out as salary.

*To receive $4,000 of net pay from the corporation, a gross salary of ~$8,000 would be required, and $4,000 would be paid to Canada Revenue Agency.

 

In sum, the total tax savings from donation of securities instead of cash is as follows:

Tax Savings from donating Securities instead of Cash $1,016
Tax Savings from additional CDA (Tax Free-Dividends) $4,000
Total Tax Savings $5,016

 

If you would like a consultation regarding tax for physicians, please contact us.

* This article was prepared on December 21, 2022. Content is for informational purposes only and is not intended to be used as professional advice. Each taxpayer’s circumstances are unique. Bokhaut CPA makes no representation as to the accuracy and completeness of the information in this article and will not be liable for any errors or omissions in this information. 

You May Also Like…

I Just Called to Scam You

I Just Called to Scam You

How to determine if it’s CRA on the line. Over the past few years, scam phone calls from individuals claiming to be from the Canada Revenue Agency (CRA) have increased. As we approach the time of year to file personal tax returns, these calls become more frequent as...

RRSP or TFSA

RRSP or TFSA

RRSPs and TFSAs are both “registered” investment accounts, which means that they receive special tax treatment that is not applicable to other “non-registered” investment accounts. The special tax treatment of these accounts increases the total benefit of investing by...

Month of Giving (Part 2): Tax Efficient Donating

Month of Giving (Part 2): Tax Efficient Donating

Many physicians in Canada have incorporated their practices, as there are significant tax benefits to doing so. This then provides incorporated doctors with two avenues to donation: Corporate Donations Personal Donations We are often asked, “should I make donations...

Month of Giving (Part 1): Donation Tax Credit Refresher

Month of Giving (Part 1): Donation Tax Credit Refresher

December is the month of giving. While deciding which charitable organizations you wish to support this year, the following donation tax credit information is good to keep in mind:   What qualifies as a donation for tax purposes? To qualify for the donation tax...

The Season of Giving – is it taxable?

The Season of Giving – is it taxable?

As the holiday season approaches, it is not unusual for doctors to provide gifts to their employees, hospital administrative staff, colleagues, and nurses. While these gifts are generous gestures, they may result in unexpected tax implications. Gifts to Employees When...

Financial Considerations of Buying a Home

Financial Considerations of Buying a Home

  There is a lot to think about when you buy your first home. What colour should you paint the living room? What should the extra bedroom be used for? A home office? A gym? Or maybe a nursery? Outside of aspirational objectives, there are many practical matters...

Moving Expenses: When are they deductible for physicians?

Moving Expenses: When are they deductible for physicians?

Are you a physician who moved in 2022, or are considering a move in 2023? If so, your moving expenses may be deductible for tax purposes.   Are you eligible to claim moving expenses? To claim moving expenses, you must meet the following criteria outlined by CRA: One...

The Self-Employed Physician

The Self-Employed Physician

How to Organize Yourself for Personal Tax Filing   Step 1: Be Aware of Your Income & Expenses   As a self-employed physician, fee-for-service income can come from a variety of sources, including various health authorities (WRHA, NRHA, IERHA, etc.),...