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Donation Donuts
May 2001
Some gift giving plans have holes in them and some don't. The question is often asked; should I give cash or should I donate property directly to a charity? In the absence of a little number crunching and a general understanding of the rules you might be surprised to find yourself holding a donut instead of a French cruller.
There are many types of property that may be gifted to a charity. For our purposes, the different properties include:
? Publicly traded securities (stocks, bonds etc)1,
? Ecologically sensitive land2,
? Cultural property3, and
? Cash.
The key to arriving at the right course of action is to recognize that when you make a gift of property you are deemed to have disposed of the property for its fair market value [FMV]. If this value should happen to be greater than what the property cost you when you originally bought it [your adjusted cost base or "ACB], a capital gain will be triggered for income tax purposes. In addition, the gifting rules provide that, depending on what property is donated, all or only a portion of the taxable capital will be subject to tax. Table 1 summarizes the amount of gain from each property subject to tax:
Table 1 demonstrates how, for example, gains on the gift of cultural properties are reduced to zero. As a result, the tax credit generated on the gift can by used to offset other sources of income.
Table 2 below, provides the detailed calculations associated with gifting cash, selling securities and then gifting cash and gifting publicly traded securities directly to a charity.
With a cup of coffee and a donut we can see the Table 2 numbers tell us the following:
(1) A gift of cash provides always provides the best immediate tax savings equal to 47.86% of the value of our gift; in this case $47,860. Since there is no capital gain generated on the gifting of cash, the available tax credit can be used against other sources of income. However, this only tells part of the story. If you also owned $100,000 in publicly traded securities the future tax cost associated with the capital gain on these securities has not yet been factor in [i.e. $24,380 as set out in column two of Table 2].
(2) If you where to sell your securities you would have a tax liability of $24,380. If you add this cost to after tax cost of the original cash gift from column one [i.e. $ 51,240 + $24,380 = $75,620] we see the result is no different then selling the securities and gifting the cash, as set out in column two.
(3) Now, if we move to column three we see that the most tax effective strategy is to gift your publicly traded securities directly to the charity. This result is achieved because of the special reduction in the capital gain realized on the gift by by 25%. This reduction reduces the tax liability generated on the capital gain from $24,380 to $12,190. The tax savings of $12,190 should keep you in good stead with the local Coffee Time or Tim Hortons.
Table 1 - Reduction in Capital Gain on Different Types of Gifted Property
Assumed
Capital
Gain
Normal
Gain
if Sold
Reduction in
Taxable Gain
if Gifted
Gain Subject
to Tax
when Gifted
Publickly Traded Securities
100,000
50%
50,000
50%
25,000
Ecologically Sensitive Lands
100,000
50%
50,000
50%
25,000
Cultural Property
100,000
50%
50,000
100%
-
Other Capital Property
100,000
50%
50,000
0%
50,000
Table 2 - Comparison of Tax Results on Gifting Different Types of Property
Gift of Cash
Sale of Securities
Followed by
Gift of Cash
Gift of
Publicly Traded
Securities
FMV of property gifted (deemed proceeds)
(A)
100,000
100,000
100,000
Capital Gain on Gift
(B)
Proceeds of Disposition (FMV of gifted property)
100,00
100,00
100,00
Original cost of Property (ACB)
(100,00)
-
-
Capital Gain
-
100,000
100,00
Taxable Capital Gain - normal rules
50.00%
-
50,000
50,000
Reduction in Capital Gain - gifting rules
50.00%
-
-
(25,000)
Gain Subject to Tax
-
50,000
25,000
Tax at Top Tax Rate
48.76%
(C)
-
24,380
12,190
Donation Tax Credit = Tax Savings
48.76%
(D)
48,760
48,760
48,760
After Tax Cost of Donation [(A)+(C)-(D)]
(E)
51,240
75,620
63,430
Tax Shield [1-(E\A] x 100]
(F)
48.76%
24.38%
36.57%
1 The rules for gifts of publicly traded securities are effective from February 18, 1998 to January 1, 2002. Gifts of this type of security which qualify for the reduced capital gains rate are reported on Form T1170 and not the usual Schedule 3.
2 Such gifts must be made to Canada, a province, municipality or charity recognized by the Minister of the Environment to have as its primary purpose the conservation and protection of Canada's environmental heritage.
3Such gifts must be certified by the Canadian Cultural Property Export Review Board and be made only to designated public authorities or institutions in Canada.
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