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Discover the opportunity that the inclusion rate for capital gains changes created.
As of June 25, 2024, the inclusion rate for capital gains increased from 50% to 66.67% for corporations. While this change will generally result in higher corporate taxation, it presents an opportunity for donations.
Donating cash is, by far, the most popular way to get money to registered charities. It’s also very simple. Your corporation (“the company”) gives the charity the cash and receives a tax receipt back. The donation is deductible from the company’s income and results in tax savings. For example, if the company’s small business tax rate is 9%, a $1,000 donation would save $90 in taxes.1 The higher the tax rate, the higher the savings.
An opportunity also exists if the company has certain investments that have appreciated in value. These would include investments such as mutual fund trust units, mutual fund corporation shares and shares listed on a designated stock exchange.2 By donating these investments, you get the same tax advantages as for cash noted above. The donation amount is based on the fair market value (“FMV”) of the investments, at the time the donation is made.
Donating securities has additional benefits
When you donate capital property (such as investments), there is a disposition for tax purposes. If the securities have appreciated in value, there would be a capital gain equal to FMV less their adjusted cost base (“ACB”). To incentive donations, the inclusion rate for this capital gain will be 0%, instead of the usual 66.67%. In other words, the appreciation in value of the securities isn't taxable to the corporation, if all conditions have been met. This can be very valuable for larger donations.
Let’s look at an example of this strategy in action using two scenarios. For both scenarios, let’s assume a company has investments with an FMV of $500,000 and an ACB of $400,000 and wants to donate $500,000 to charity.
Scenario #1
Let’s assume the investments are sold and the proceeds are then donated. In this case, the company would receive a donation receipt for $500,000. However, the sale also triggers a capital gain of $100,000 ($500,000 - $400,000). With a 66.67% inclusion rate, the taxable portion of the gain is $67,667. So overall, the reduction in income to the company from the donation is $433,333 ($500,000 - $67,667).
Scenario #2
Let’s now assume that the securities are donated in-kind to the charity. Again, the company receives a $500,000 donation receipt. This time, however, the capital gain of $67,667 is eliminated, meaning the reduction in income is the full $500,000. Overall, the in-kind donation of the securities produces better tax results for the company than selling first and then donating.
The example above also illustrates that the value in-kind donations has increased with the change to the capital gains inclusion rate. Previously, when the rate was 50%, the company would have avoided a $50,000 income inclusion though the in-kind donation. With the rate change, that figure has increased to the $67,667 as we see above.
With proper planning, not only can charities better benefit from donations, but business owners may too.
1 Donations are limited to 75% of net income each year. Unused donations can be carried forwards for up to 5 years.
2 You may be entitled to an inclusion rate of zero on any capital gain resulting from the donation of any of the following properties to a qualified donee: a share of the capital stock of a mutual fund corporation; a unit of a mutual fund trust; an interest in a related segregated fund trust; a prescribed debt obligation that is not a linked note; ecologically sensitive land including a covenant, an easement, or in the case of land in Quebec, a personal servitude (when certain conditions are met), or a real servitude donated to certain qualified donees other than a private foundation; a share, debt obligation, or right listed on a designated stock exchange.
Information contained in this article is provided for information purposes only. Its not intended to provide or be a substitute for professional, financial, tax, insurance, investment, legal or accounting advice and should not be relied upon in that regard. It also does not constitute a specific offer to buy and/or sell securities. You should always consult your financial advisor or tax specialist before undertaking any of the strategies discussed in this article to ensure that all elements and your personal circumstances are taken into consideration in developing your individual financial plan. Information contained in this article has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy and SLGI Asset Management Inc. disclaims any responsibility for any loss that may arise as a result of the use of the strategies discussed.
SLGI Asset Management Inc. is the investment manager of the Sun Life family of mutual funds. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the fund’s prospectus. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
Sun Life Assurance Company of Canada is the issuer of accumulation annuities (insurance GICs), payout annuities and individual variable annuity contracts (segregated fund contracts). Any amount that is allocated to a segregated fund is invested at the risk of the contract owner and may increase or decrease in value. Sun Life Financial Trust Inc. is the issuer of guaranteed investment certificates.
Sun Life Global Investments is a trade name of SLGI Asset Management Inc., Sun Life Assurance Company of Canada and Sun Life Financial Trust Inc. all of which are members of the Sun Life group of companies.
