No capital gains taxes payable on donations of shares, you say?
March 13th, 2023
We talk a lot about the tax benefits of gifting to charity, especially donations of shares. But what if your accountant or tax preparer does not know that you gifted shares to charity? This is a common issue: people making share gifts but not seeing the charitable benefit making a full impact and appearance on their tax return.
Capital gain exemption
First, let’s talk about the exemption on paying taxes on the capital gains of the investments when donating in-kind to charity. Canada’s tax system allows Canadians to contribute shares of publicly traded companies and mutual funds directly to charitable organizations and universities. If the shares go direct without being sold first, there will be no tax payable on the capital gain. This transaction must be reported on your personal tax return by completing a T1170.
Just last week we met with a couple who had done a wonderful thing making a charitable gift of investments. The value of their mutual funds had increased, and they had a large capital gain over the last 15 years. They were about to change their investment dealer and the new dealer could not accept this certain mutual fund group, so they were going to split the mutual fund shares and donate to two charitable organizations that they loved.
The gift of mutual fund shares would allow them to transfer those investments directly to the charity or the university without paying any capital gains tax. Glenn Stewardson, Financial Planning Advisor with Assante Capital Management Ltd. in Halifax, says, “The issue is the communication with the tax preparer. All the tax documents are gathered, but the T Slip (T5008) that shows the capital gain is not connected to the charitable donation receipt. A simple note to the accountant or tax preparer will allow them to make the connection.”
An overview of events
In November last year, this couple gifted the mutual fund shares, and their financial institution transferred those mutual funds to the two organizations that they care about.
The organizations thanked them for the gift and sent charitable donation receipts for the share value at market close the day the organization’s broker received the shares.
When the couple’s December 31 investment statement arrived, it showed the mutual fund shares transferred out and a capital gain on the increased value of those shares which needs to be added to the donors’ tax returns.
So, at this point, the donor needs to note which investments were gifted in kind to the charities. The tax preparer will then know that those shares were specifically gifted to the charitable organizations so they can complete a T1170 form to remove the tax on the capital gains.
Sell Shares: $100,000
Capital Gain: $60,000
Taxable Amount: $30,000
Taxes Paid: $15,000
Tax Credit*: $50,000
Net Cost to Donor: $65,000
Gift of Shares: $100,000
Capital Gain: $60,000
Taxable Amount: $0
Taxes Paid: $0
Net Cost to Donor: $50,000
Reporting these in-kind gifts correctly made a difference of $15,000 for this couple on their tax return
The Bottom Line
The tax preparer will not always make the connection that the donation receipt was created by the gift of the shares because it is not noted on the financial institution’s investment statement. The donor needs to include a note with the tax documents.
Stewardson says his team now sends a note along to the tax preparer on their clients’ behalf to make sure the share donation is connected to the charitable donation receipt. The donors then need to discuss with the tax preparer the best use of the tax credits, either claiming all in one year or spreading them out over a few years based on income and tax brackets.
In this case, it opened the couple’s eyes to a whole new strategy of giving shares and saving tax.
*NS Tax Rates used for 29% Federal tax and 21% Provincial Tax Credits