Benefits of making charitable donations by your corporation
This week I share another business owner story.
Author Glenn Stewardson
Imagine you have worked hard to grow your business and build up some wealth inside the company. You have investments and assets inside a holding company or your corporation, and now you wonder how you are going to get the money out of the company.
I met a couple this week who are business owners and who have done very well investing and growing their business investment account over the years in a numbered account holding corporation. So, now they have a tax problem. We discussed one idea to share with his accountant and to see if this would work.
They hold bank shares in their numbered company with $15 adjusted cost base (ACB) and current share price is $125. That means that each share has an unrealized capital gain of $110 if they sold today. We reviewed the idea of giving a $100,000 gift of these bank shares to put into a Donor Advised Fund (DAF). The idea shared was to gift in-kind 800 bank shares at a current value of $125 per share or a total of $100,000. The unrealized capital gain is $110 per share at $88,000. The gifting of the shares directly into the DAF means they are transferred into the DAF and not sold first. So, no capital gains tax payable when gifted to a charity entity.
The rules relating to donations in-kind are similar for both individuals and corporations. When gifting a publicly traded stock or security the results are a charitable donation equal to the value of the security at the time of the gift. This would offer an additional benefit as the income tax on unrealized capital gains on the security donated is eliminated. This small important process increases the overall tax savings when compared with selling the security and donating the cash. This is so great for donations by a company as this allows the shareholders to withdraw the full amount of the capital gain without personal taxation through their capital dividend account. We should dive a little deeper into the plan.
This couple is in the highest marginal tax bracket and had cash available in both their personal and corporate accounts that could be used to fund their charitable giving objectives. In the past, they had given cash or by credit card. With cash gifts there would not be a significant tax difference between donating personally or through their company. With the unrealized capital gains in their company bank shares, they wish to transfer these shares in-kind to the Donor Advised Fund. This gift will create an overall tax benefit of $51,000 by first donating the security in-kind, which also increases their CDA balance by $88,000.
In simple terms, the Capital Dividend Account (CDA) is a notional account that tracks their non-taxable portion of realized capital gains and losses on a cumulative basis inside the company. If they have a positive amount in the CDA, this can be extracted from the company without personal taxation. The company needs to file all the appropriate tax election forms and legal resolution. The benefits of using the donation in-kind strategy are illustrated in the table below which assumes a combined federal and provincial corporate tax rate of 51%.
In the table above, donating the securities directly reduces the cost of the donation to the company by approximately $22,440 with the elimination of tax on the realized capital gain.
In addition, the increase to the Capital Dividend Account is doubled from $44,000 to $88,000. If other surplus assets are being withdrawn from the corporation, this would reduce personal tax on $88,000 of such withdrawals. If surplus assets are not being withdrawn, this CDA amount could still be paid out and loaned back to the company – thereby reducing the value of the shares held in the company.
This is not tax advice; this was the discussion with this couple and how this strategy made sense in their situation. Consult your Accountant and/or Financial Advisor to review if this idea would be good for your company.
Glenn Stewardson, CFP®, FMA. MFA-P(Philanthropy) is a nationally known speaker and author of Retire Abundantly, the proven principles to create a more worry-free retirement with less stress! Glenn is also a Financial Planning Advisor with Assante Capital Management Ltd. in the Hydrostone Market in Halifax.
The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd. Please contact Glenn at 902-492-3350 or visit glennstewardson.ca to discuss your circumstances prior to acting on the information above.
Assante Capital Management Ltd. is a Member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada.