December is the month when the majority of our clients make the bulk of their charitable gifts. Advisors are in a unique position to suggest some charitable giving ideas based on the value of the assets in their clients’ portfolios. Here are three topics to discuss before Dec. 31.
Tax-gain donating
For clients who have built up substantial unrealized gains in their non-registered stock portfolios, what better time to remind them about “tax-gain donating”? In-kind donations of publicly traded shares, mutual funds or segregated funds to a registered charity not only provide your client with a tax receipt equal to the fair market value of the securities or funds being donated, but also allow them to avoid paying capital gains tax on any accrued gain on the shares or funds donated.
If your client still wants to hang on to that winning stock, no problem. They can donate it “in-kind” to charity, and then use the cash they were going to donate to the charity to repurchase the stock back on the open market. After all, there is no superficial gain rule! Buying back the stock immediately bumps up their adjusted cost base of the stock that was just donated to fair market value.
Tax-loss donating
Have clients who own energy stocks? 2020 has not been kind to the energy sector, which is down over 25% year-to-date. If clients have realized other capital gains earlier this year (perhaps on their information technology stocks, with the sector up some 75%), they could consider donating their losing shares to charity. Again, they will get a receipt for the fair market value of the shares being donated, but will also realize a capital loss on the donation, which can be used to offset the capital gains triggered in 2020. Any unused net capital loss can be carried back three years or carried forward indefinitely to be applied against taxable capital gains in those years.
RRSP/RRIF donations
Finally, clients often overlook the opportunity to donate RRSP/RRIF withdrawals to charity, not only to offset the tax bill on the funds withdrawn, but perhaps to use any excess credit to shelter other sources of income.
To illustrate, let’s say Harold, a resident of Ontario, is retired and his income is $45,000 in 2020. He wishes to withdraw $1,000 from his RRIF and donate this amount to charity.
His donation credit on the first $200 would be 15% federally ($30) and 5.05% in Ontario ($10.10). On the next $800, Harvey would get a federal credit at 29%, worth $232, and an Ontario credit at 11.16%, worth $89.28. In total, his donation tax credits equal $361.38.
But on Harold’s $1,000 RRIF withdrawal used to fund his charitable gift, he would only pay tax at a 24.15% combined federal/Ontario marginal tax rate, or $241.50. That means he would have an excess tax credit of $119.88, which he could use to offset taxes on his other income, including his Canada Pension Plan benefits or OAS income.