Giving to charity is a great way to support causes that you believe in and make a positive impact on your community. In our last blog post, we covered the general tax credits you receive when you make a charitable donation in Canada. Today we will explore the tax benefits of gifting securities to charity both personally and within a holding company.
When an individual gifts publicly traded securities, such as stocks or bonds, to a registered charity, they will receive a charitable tax receipt for the fair market value of their gift to be used for tax purposes. The fair market value will be the closing price of the securities on the date the securities are received by the charity. As we saw in our last post, this can result in a tax credit of up to 50% of the amount of the donation. In addition to this, they are also exempt from the capital gains tax that typically applies to the sale of a security, which can result in significant tax savings.
Holding companies can also gift securities to charity and receive similar tax benefits. When a holding company gifts publicly traded securities to a registered charity, it is also eligible for a charitable tax credit equal to the fair market value of the securities and is exempt from paying capital gains tax on the securities. The key difference between giving personally versus through a private corporation is that private corporations have a notional account called the capital dividend account (CDA). The CDA tracks the balances in a private corporation which are eligible to be flowed to a shareholder on a tax-free basis. The existence of this account creates a financial planning opportunity which can make a charitable gift through a corporation particularly attractive.
When a charitable gift of securities with accrued gains is made by a private corporation, the CDA is credited with the non-taxable portion of the capital gain. In this case, this is 100% of the capital gain. So a donation of publicly traded securities to a private corporation will result in the entire capital gain being applied to the CDA, which means the amount of the capital gain can be flowed to a shareholder tax free. This is the major advantage of donating securities within a holding company.
Whether you are an individual or a holding company, gifting securities can result in significant tax savings.
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