Taxation of Charitable Donations-In-Kind
While cash gifts are the most common form of charitable donation, it’s also possible to make a “donation in-kind,” which is the transferring of assets.
When you make a donation in-kind, you are considered to have disposed of the donated property at its current fair market value. If the current value of the donated property is greater than its tax cost, you will realize a gain for tax purposes upon making the donation. The amount of the donation for tax purposes will be equal to the property’s current value. This will be the amount your non-refundable tax credit for charitable donations is calculated.
When you donate certain types of capital property, your gain for tax purposes is deemed to be nil, so you won’t pay any tax on the appreciation in value of the donated property. However, you still get to claim a non-refundable tax credit based on the current value of the donated property.
Property that qualifies for this treatment includes:
- Certain types of publicly traded securities (e.g., shares, debt obligations), shares of a mutual fund corporation, and units of a mutual fund trust
- ecologically sensitive land, the conservation and protection of which is important to the preservation of Canada’s environmental heritage
- certain types of cultural property (e.g., property of national importance to the protection and preservation of examples of Canada’s artistic, historic, and scientific heritage)
If you wish to donate to a charity and hold qualifying property, the tax benefit of donating the qualifying property can significantly reduce the out-of-pocket costs associated with a cash donation.
For example, consider a BC resident individual who is in the top tax bracket and can either donate $10,000 in cash, or $10,000 of qualifying publicly traded securities with a tax cost of $5,000.
|Donation tax credit (Fed. & BC)||-4.980||-4,980|
|Capital gains tax avoided (Fed. & BC)||-1.245|
|Net cost of donation||$5,020||$3,775|
A donation tax credit for a particular year may only be claimed if a donation is made by December 31st of that year (or if you have unclaimed donations carried forward from prior year). This can be a problem if you come into significant income late in the calendar year and decide to fulfill your philanthropic intentions by making a substantial charitable donation from that income.
For example, consider a taxpayer who sells their business late in the calendar year, realizes a substantial taxable capital gain and then retires. The lump-sum taxable capital gain in one taxation year will be taxed at the top marginal rate of 49.8%. If the taxpayer makes a donation in that same year, they will get a 49.8% tax credit for the donation.
Although the taxpayer was considering making a substantial charitable donation when the sale of the business completed, they’ve simply been too preoccupied with the sale to think about what causes they want to support.
Since the taxpayer waited until the following calendar year to make the donation, a couple of problems arise.
One, the taxpayer is now retired and has significantly lower annual income. Charitable donations claims in a particular year are limited to 75% of the taxpayer’s net income for that year, so the amount of claimable donations for that year will be significantly less than the amount they could have claimed in the year the business was sold.
Two, the taxpayer’s gain was taxed at the top marginal rate of 49.8%. However, since the donation was made in the subsequent year when the taxpayer was no longer in the top marginal tax bracket, the donation tax credit for that year is only 45.8%.
How we can help you
A taxpayer in this situation could benefit from establishing and donating to a private foundation or donating to a donor-advised fund. The donation can be made in the same year the business sold, but the decision about which causes to support through the private foundation or the donor-advised fund can be deferred to the next year.
Let our team DMCL experts help you with your next charitable donations-in-kind.