Help your clients take advantage of tax benefits.
When your client transfers publicly listed securities directly to the QEII Foundation, the capital gain inclusion rate is 0 percent, rather than the usual 50 percent. This means none of the gain is taxed and your client will still receive a charitable tax receipt for the full market value of the securities. Your client may be able to substantially increase the amount of their gift for the same after-tax cost.
In order to qualify for this special tax treatment, the securities must be transferred in-kind to the QEII Foundation, and not sold with the proceeds contributed. The elimination of capital gains tax also applies to gifts of securities in a will.
Please note: Refer to procedures for donating securities for important information.
Should your client have available cash or stock to donate, they could donate the stock and use the cash to repurchase the stock, thereby bumping up the cost base of the stock to today’s value.
What are the benefits of this kind of gift?
✓ Immediate charitable tax receipt for fair market value of security
✓ Elimination of capital gains tax on securities when disposed of in the future, perhaps making a larger gift possible
✓ Gifts may be given during donor's lifetime or through their will
Does your client own a holding company?
If your client owns a company holding publicly-listed securities, it may be advantageous to use these assets to make the gift. The tax free portion of the transaction, which in this case will be 100% of the capital gain, may be credited to the company’s capital dividend account. Any balance in this notional account may be paid out tax free to shareholders.
Donating a portion of shares to eliminate tax on shares sold
A tax liability is triggered when your client sells securities with an accrued capital gain. One-half of the gain must be included in their taxable income. This can mean a significant tax bill for securities they may have purchased years ago and which have a low adjusted cost base.
Donating the securities is one way of eliminating the taxable capital gain. However, your client may not wish to donate all the securities as they may want to reinvest the proceeds, or use them for lifestyle expenses. In this case, they could donate a portion of the securities and sell the remaining portion. The donation tax credit on the portion of the securities donated can eliminate the tax liability on the capital gain triggered by the disposition of the remaining portion (i.e. portion not donated).
To do this effectively the portion of securities needed to be donated must be calculated so the tax on the securities to be sold will be eliminated. The following formula may be used to determine this amount.
FMV = Fair Market Value of securities
ACB = Adjusted Cost Base of securities
FMV of the securities to be donated =
(FMV)(FMV – ACB)
(3FMV – ACB)
Assume a FMV of securities of $50,000 with a zero ACB:
FMV of the Donated Securities =
($50,000) x ($50,000 - $0)
(3 x $50,000 - $0)
FMV of Securities to be donated = $16,667