In-Kind Donations to Charities


By Linson Chen, BA CFP CIM

 

Cash gifts are the most common way to donate to a charity.  It’s a simple way to give and it provides you with a tax credit, but it may not be the most tax-efficient way to donate.

Scenario: John has significant assets inside his non-registered account with a large unrealized capital gain.  He would like to donate $10,000 to the BC Children’s Hospital from his investment account.  He wants to know if he should sell a mutual fund that has appreciated significantly in value or if he should donate the mutual fund in-kind?

 

The 2006 Federal Budget eliminated the taxation of capital gains on in-kind transfers of mutual funds and publicly traded securities for charitable donations.  For mutual funds and publicly traded securities that have increased in value, 50% of the capital gain must usually be reported as income and taxed accordingly.  However, if they were donated in-kind rather than being sold, the capital gain reported is reduced to zero.

 

                                                            Sell Fund and Donate              Donate Fund In-Kind

Proceeds (Cash Donation)

 

Market Value of Shares                                $10,000                                   $10,000

Adjusted Cost Base                                      $4,000                                     $4,000

Capital Gains                                                 $6,000                                     $0

Taxable Capital Gains (50%)                        $3,000                                     $0

Tax at 45.8%*                                                 ($1,374)                                   $0

Net cost of donation                                     $11,374                                   $10,000

 

*2014 highest marginal personal tax rate in BC over $150,000 is 45.8%

 

The donation amount received by the BC Children’s Hospital (market value of the security donated) and the total tax credit would be the same whether the donation is made in cash or in-kind. However, by donating in-kind John was able to save paying taxes on his capital gains.  The example above yields an extra $1,374 in savings by donating in-kind to the charity compared to donating in cash that could subsequently also be donated to the charity .  .  It is important to have a strategy that maximizes your gift and minimizes your tax liabilities.