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Charitable Donation Tax Credit – Part 2 (Strategies)

Continuing on from yesterday’s discussion on the Charitable Donation Tax advantages and how it works, I’ll now move onto some of the strategies that I’ve come across to maximize the tax credit.

Tax Strategies

Some of you may be just starting out on your charitable giving pursuit and donating less than $200/year. Here are some tax strategies to maximize your tax credit return.

  • If you have a spouse you can add all the charitable donations for that year under ONE spouse.
  • You can carry forward your donation tax credit up to 5 years and only use the $200 limit once. For example, if you donate $100 every year, instead of getting the lowest tax credit every year, you can carry it forward up to 5 years so that out of your $500 donated, $300 will be given a tax credit at the highest marginal rate. In Newfoundland, that would result in a difference between getting $130 back or $197.56 after 5 years.

For those of you who are more affluent, you may want to donate stock instead of cash. With the new tax rules, donating stock to charity will result in 0% capital gains and a tax credit for the market value of the securities donated.. If you have a big capital gain on a stock and you want to sell, you can donate a portion of your gain to charity to reduce your capital gains tax to $0!

  • Here is an article on StingyFinance.com, that was originally written by Tim Cestnick, that describes the number of shares that you can consider donating to reduce your capital gains tax payable.

… donate $20,000 worth of XYZ shares to charity and sell the rest worth $80,000. The result? The tax on the $80,000 worth of shares sold is $9,200. The tax on the $20,000 worth of shares donated is zero.

The donation tax credit for those donated shares will be $9,200 — exactly enough to offset the tax on shares you kept for yourself and sold to reinvest. You’d be left with $80,000 in your pocket after the donation (and no taxes).

Now, keep this formula handy:

  • The amount you donate to charity should equal the fair market value (FMV) of all the shares ($100,000 in our example)
  • Multiplied by the capital gain on the shares ($50,000).
  • Then, divide that answer by the following: Three times the fair market value (3 x $100,000) less the adjusted cost base (ACB) of the shares ($50,000).
  • The answer is $20,000 in our example.

In algebraic terms: Donation = (FMV)(FMV – ACB)/(3FMV – ACB). This formula will allow you to determine the exact value of the securities to donate to eliminate your tax. Call me a math geek, but it works every time, regardless of your tax rate…

Final Thoughts

Although the tax credits are great, I’m a firm believer in helping those who are less fortunate and donating to charities is one way to do this.

Do you regularly donate to charity? If so, which ones are your favorite?

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 16 comments… add one }
  • canadiandollars March 7, 2007, 10:45 am

    how does one donate shares to a charity? I’m with E*Trade and wondering if there are administration charges that Etrade will charge me if i do this.

    I wonder if doing this is only worthwhile for large amounts or not.

    Do you know?

  • FrugalTrader March 7, 2007, 10:48 am

    CAD$,
    You have to arrange it with both the charity and your brokerage. In terms of brokerage fees, it depends on the brokerage that you’re with.

    Also note that NOT ALL charities accept stock, AND, it complicates your tax return (not accepted on netfile so far).

    Just a heads up.

  • canadiandollars March 7, 2007, 10:50 am

    to answer your last question: I’m a big fan of donating to canadian cancer, foodbank, united way. I try to find time twice a year to volunteer at the foodbank during holiday seasons :)

  • Qubikal March 7, 2007, 12:50 pm

    Thanks for all the great tips.

    Don’t mean to be selfish here, after all I do realize that this thread is meant to be about donating to those in need.

    I just want to clarify that by donating the stock to charity does not mean that you are better off than by not donating at all. (just in case you were hoping that this is the case).

    This just means that if you want to donate, that it is a better idea to donate stock, rather than cash, based on the calculation as noted, you are reducing the capital gains tax.

    FT – I tried to go through Tim’s Formula;, however I believe that his formula makes two assumptions:

    1) you are also at the highest tax bracket in your province, which is equal to the tax credit on the contributions. I tried to run the calculations with your stated tax rates above and the tax credits do not equal.

    2) the formula does not take into account that the first $200 credit is given at the lowest tax rate.

  • FrugalTrader March 7, 2007, 1:20 pm

    FMV = $10,000
    ACB = $5,000
    Donation = (FMV)(FMV – ACB)/(3FMV – ACB)
    = $2,000 worth of shares
    Tax credit on donation = ($200 x 0.261) + ($1800 x 0.4864)= $927.72

    @ 40% marginal tax rate:
    Capital Gains = ($8,000-$5,000) x 0.50 x 0.40 = $600.

    @ 50% marginal tax rate = $750

    In these scenarios, the formula actually over compensates and I’ll get a tax credit greater than my capital gains.

  • DotMySpot March 7, 2007, 3:00 pm

    hiye.. just stopping by to say ‘hi’

    hmm..@@” are you raising money through charity?

  • Jerry May 1, 2007, 7:59 pm
  • Khaliph Bey July 5, 2008, 5:04 pm

    How do you sell a tax credit on the open market.

  • rus April 23, 2009, 7:36 am

    when do I get the tax credit back? I received income tax credit in the form of direct deposit, but the credit from my donations isnt received in the same deposit. Should I be worried?

  • FT FrugalTrader April 23, 2009, 8:01 am

    rus, the tax credit should be applied against any taxes payable for the year. If you are due a tax refund, it should already be included.

  • rus April 23, 2009, 7:57 pm

    That’s weird. I prepared my tax using ufile.ca and submitted it through netfile. I am missing about 2k in tax refund which is the refund from my donations. Is it because I didn’t submit the receipts or would the government want to investigate? Do I expect them to ask me for receipts?

    It really doesn’t matter if I don’t claim it, but it would be nice to get it this year so I can put it into my RRSP account.

  • Bryce December 18, 2013, 12:43 pm

    If you have employee stock options you can also donate the proceeds when you do the “cashless” exercise and get a similar tax treatment where you don’t have to pay nay tax on the donated amount AND you get the donation credit. Just make sure the broker directs the funds directly to the charity.

    (2.1) Where a taxpayer, in exercising a right to acquire a security that a particular qualifying person has agreed to sell or issue to the taxpayer under an agreement referred to in subsection 7(1), directs a broker or dealer appointed or approved by the particular qualifying person (or by a qualifying person that does not deal at arm’s length with the particular qualifying person) to immediately dispose of the security and pay all or a portion of the proceeds of disposition of the security to a qualified donee,
    (a) if the payment is a gift, the taxpayer is deemed, for the purpose of paragraph (1)(d.01), to have disposed of the security by making a gift of the security to the qualified donee at the time the payment is made; and

  • Rick August 3, 2014, 11:25 am

    My wife and I started volenteering with Habitat for Humanity this year. We did three builds in the USA. We have three more scheduled this winter. Can we claim expences to get there from Canada and what expences are claim able? We live in a motorhome and are members of the Care-A-Vanners for Habitat.

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