Implications of the Capital Gains Increase in Canada for Corporate Donations
As discussed in our last article, Canada's recent increase in the capital gains inclusion rate, effective June 25, 2024, has stirred significant discussion among investors, philanthropists, and financial professionals. As the government aims to bolster public revenue, the ripple effects of this policy change are multifaceted, particularly when it comes to charitable donations. This article delves into the implications of the capital gains increase on donations, exploring both the challenges and opportunities that arise for business owners using their corporations for donations.
Understanding Capital Gains Tax and the Inclusion Rate
Capital gains tax is levied on the profit realized from the sale of an asset. The inclusion rate determines the portion of the capital gain that is subject to taxation. Until recently, Canada taxed only 50% of the capital gain. With the new policy which became effective June 25, 2024, corporate capital gains, are now taxed at the 67% rate.
Impact on Professional Corporation Investors
At first glance, this additional tax burden may discourage investors from triggering gains, affecting their investment strategies and liquidity. However, by donating appreciated securities that are listed on designated exchanges (PLS) directly to charities, rather than triggering gains and donating cash, these investors can avoid the higher capital gains tax while supporting causes they care about. This approach allows them to maximize their tax deductions and make a more significant impact with their contributions by eliminating the tax grind on after-tax donations.
Comparison of donating cash or PLS to Unison Alberta:
As a result of donating appreciated investments and eliminating the capital gains tax, this individual had tax savings of $251,920 rather than selling the investments and donating with after-tax cash.
Corporate Donations and the Capital Dividend Account (CDA)
The Capital Dividend Account (CDA) is a notional account used by private Canadian corporations. It keeps track of certain types of income that can be distributed to shareholders tax-free. One key aspect of the CDA is its role in handling capital gains, particularly when donating securities in-kind.
Here are the benefits:
Tax-Free Distribution: As already discussed, when a corporation realizes a capital gain, 67% of that gain is taxable. The non-taxable portion (the other 33%) can be credited to the CDA. This amount can then be distributed to shareholders tax-free as a capital dividend. When the corporation donates PLS, 100% of the capital gain may be recorded in the CDA for tax free payment to shareholders.
Charitable Donation Tax Deduction: While personal donations lead to a donation tax credit. Corporations that donate PLS in-kind allow the corporation to receive a tax deduction based on the fair market value of the securities. This can offset taxes up to 75% of their net income in that year or carried forward to be used in any of the following 5 tax years.
Overall, using the CDA when donating securities in-kind can provide significant tax advantages for both the corporation and its shareholders, making it an attractive strategy for charitable giving
Strategic Donations: The Silver Lining
Despite the higher capital gains inclusion rate, there remains a silver lining for corporate donors. The incentive to donate appreciated securities directly to charities is more appealing than ever. By doing so, donors can bypass the increased capital gains tax, allowing them to give more generously. This strategy not only benefits the donors by reducing their taxable income but also ensures that charities receive more substantial support.
Reach out to your financial professional or contact me with further questions.