Using Your Generosity Plan™ for Tax Efficient Giving
The recent surge in real estate prices has inspired many Canadians to put property on the market. For those selling a property that does not qualify for the principal residence exemption, the resulting capital gain can mean a hefty tax bill. Making a donation to charity can help offset the capital gains tax, but did you know choosing the right way to give can make a big difference?
When Anne’s* husband passed away, she sold their cottage for $300,000. Anne wanted to honour the wonderful memories of spending time there with her husband by making a significant donation to their favourite charities. Her accountant suggested she meet with Abundance Canada to develop a Generosity Plan™.
Weighing Different Ways to Give
Anne and I discussed her charitable ambitions and her financial position. She explained that she wanted to donate $100,000 to her favourite charities. In addition to the proceeds from the sale of the cottage, Anne held significant publicly traded securities, which she planned to use to finance her donation. We quickly sketched out her options to determine the most tax-efficient solution.
|Option 1: No Donation to Charity||Option 2: Donate Cash From Cottage Sale to Charity||Option 3: Donate Publicly Traded Securities to Charity|
|Proceeds From Sale of Cottage||$300,000||$300,000||$300,000|
|Market Value of Publicly Traded Securities||$100,000||$100,000||$100,000|
|Capital Gains Tax* Owing on Sale of Cottage||($50,000)||($50,000)||($50,000)|
|Capital Gains Tax* Owing on Securities||($20,000)||($20,000)||$0.00|
|Donation to Charity||$0.00||($100,000)||($100,000)|
|Donation Tax Credit||$0.00||$50,000||$50,000|
|Net Balance (After Tax Cash Position)||$330,000||$280,000||$300,000|
*50% Marginal Tax Base
In Option 1, we calculated what would happen if Anne were to keep the $300,000 from the sale of the cottage and sell $100,000 in publicly traded securities without donating anything to charity. In this scenario, she would owe $50,000 in capital gains tax on the sale of the cottage and $20,000 on the sale of her securities, leaving her with a net after tax position of $330,000.
In Option 2, we looked at what would happen if Anne proceeded with her original plan to sell the securities and donate the cash. It soon became clear this was not a tax-efficient option. Even though she would receive a donation receipt for $100,000, Anne would still owe capital gains tax on the sale of the cottage as well as incurring $20,000 of tax liability on the sale of the publicly traded securities. Her net after tax position would be $280,000. This was her least tax-efficient option.
Publicly Traded Securities Can Be the Most Tax-Efficient
In Option 3, I explained how Anne could donate the publicly traded securities in kind to charity. She would still receive $300,000 in cash from the sale of her cottage, and the tax owing would be the same. However, the $20,000 of tax liability in the investment portfolio would be eliminated. Her net after tax position would be 300,000 — $20,000 higher than if she were to donate cash.
Anne decided to proceed with Option 3: donating the securities in-kind.
Consider the Best Ways to Give
Anne created an Abundance Canada Generosity Plan™ and seeded her Gifting Fund™ by donating $100,000 of publicly traded securities in-kind. She was so happy she took the time to investigate the best way to give.
Are you looking to make a donation to offset taxes owing? Have you considered donating publicly traded securities in-kind? Contact Abundance Canada to discuss options for achieving your philanthropic goals in the most tax efficient manner.
* Pseudonym used and details changed to preserve client privacy
Contributed by Susan Yakabowich
Gift Planning Consultant