Proposed Tax Changes in Canada Could Stifle Large Charitable Gifts

I started my financial planning career doing tax-effective charitable giving at The Hospital for Sick Children Foundation and I still love to advise clients on how to marry philanthropy and personal finance. Clients were encouraged to consider donating investments (ie. not the cash proceeds) because of amazingly generous tax benefits. If you had an investment that was worth more than when you bought it and you donated it to a charity, you would receive a charitable tax receipt for the fair market value of the investment you donated and no requirement to pay tax on the capital gain. In tax jargon, we say that the “capital gains inclusion rate” would be 0%.

The 2023 Federal Budget has just passed legislation increasing the capital gains inclusion rate for donations of securities to 30%; meaning that you would report 30% of the “gain” on the investment on your tax return and pay tax at your personal marginal tax rate on that amount. While this is still less than the standard 50% capital gains inclusion rate that occurs when appreciated investments are sold on the market, it does change the landscape for large donors. For very high-income earners who are subject to the Alternative Minimum Tax (AMT), the issue becomes even more complicated.

This article provides more context and examples from the donor’s perspective. A subsequent article by the same writer explains the changes from the charity’s perspective. Combined, these articles amount to bad news for Canadians who have previously enjoyed making large donations of securities to charities. If you are one of them, you would be encouraged to consider making that donation before December 31st 2023 since the new rules come into force on January 2024.

Read the full article on the Globe and Mail

Twenty-five years ago, in 1998, 25.8 per cent of Canadians claimed donations on their tax returns. In 2021, that figure was just 17.7 per cent – and the percentage continues to decline. The good news? The total amount of donations has increased over that time to $11.8-billion from $4.3-billion.

Let’s see how UPotential’s planning services can help you reach your potential.