This tax season, let’s challenge your knowledge on personal tax.
Here is another in a series of typical tax planning and preparation situations to test you.
You are a typical Canadian. You have a big heart. You are a charitable giver.
For whatever reason, this year is special. You want to give a big sum to your favourite registered charity and have three choices on how to do it.
Dear to your heart is a piece of art you bought for $3,000 two years ago.
You were pretty sure it had increased in value so you wanted it insured and recently you got a professional appraisal that was signed off at $5,000.
A wise person told you to buy some publicly traded shares a few years back.
You are happy you did because the $3,000 you invested has grown to a $5,000 value if you were to sell them today.
You are willing to give your artwork or your shares, or you could simply cut a cheque for $5,000. It likely means all the same to the charity, but is there a better method for you, given Canada Revenue Agency (CRA) tax policies.
You bet there is a difference to you!
The clear winner for you is the gifting of the $5,000 of publicly traded shares.
Normally, if you sell shares, you pay tax on the capital gain. Or if you gift shares but not to a registered charity, you pay tax on the capital gain deemed to have been earned given the current value of the shares at the time of gifting.
However, if publicly traded shares are directly gifted to a registered charity, CRA does not require you to report the capital gain, plus you get the applicable percentage of the charitable gift deduction to reduce your taxes.
In this case, the tax savings created by not having to report the $2,000 capital gain is about a $500 tax savings, plus having the charitable gift deduction of the $5,000 gift of shares, about a $1,400 tax savings, means about $1,900 in total tax savings.
Cutting a $5,000 cheque will only give you the charitable gift deduction, about $1,400 in tax savings to you
Gifting the personal artwork will only allow the original cost of $3,000 as the charitable gift amount, despite the $5,000 valuation, so about an $850 tax savings.
As set out by CRA, personal property assets must but owned for three years before their current value is the allowable charitable gift amount. You have only owned it for two years.
If you had owned the artwork for more than three years, the charitable gift deduction would be based on the $5,000 appraised value and would yield about $1,400 in tax savings, the equivalent to cutting a cheque for $5,000.
‘Tis better to give than receive, maybe just do it wisely…