Category: Taxes

The donation of securities (shares, ETFs, mutual funds etc.) to charity is uncommon but more Canadians should consider it due to the large tax benefit, especially when the securities have large gains. Let’s start by reviewing how donations and capital gains impact income taxes before showing why donating securities is so compelling.

Donation Tax Credit

Many Canadians donate money each year to charitable organizations. In fact, CAF Canada published in 2019 that 65% of Canadians reported giving money to charity in the past 12 months. Many of these Canadians are missing out on the tax credit for donations. According to 2021 tax filing results only 18% of tax filers claimed donations on their tax returns.

The Canadian federal and provincial governments encourage charitable giving by supplying a tax credit for donations claimed on the income tax return. Not just any donation is eligible to claim, the donation must be to a qualified donee such as a Canadian registered charity. You can find a list of qualified donees here.

When donations are reported on the tax return both federal and provincial tax credits are applied. Let’s examine a $400 donation made in Ontario as an example.

	Federal tax credit	Ontario tax credit	Combined
First $200	$30.00 (15.00%)	$10.10 (5.05%)	$40.10 (20.05%)
Remaining $200	$58.00 (29.00%)	$22.32 (11.16%)	$80.32 (40.16%)
Total	$88.00	$32.42	$120.42

If an Ontario taxpayer donated $400, they would receive tax savings of $120.42 (30.11%). This lowers the actual cost of the donation to only $280. This is a significant tax savings so be sure to claim eligible donations on your tax return.

The first $200 in donations receives a lower tax credit, while the remaining donations are eligible for a higher tax credit. There is also a third federal tax credit rate on donations (33%) which only applies for individuals who are paying taxes in the highest federal tax bracket. This tax credit rate matches the income tax rate in the highest federal tax bracket. British Columbia and Quebec also have this third threshold on their provincial donation tax credit. You can see the 2023 tax credit rates for all the provinces here.

Taxation of Capital Gains

The easiest way to explain the taxation of capital gains is with an example. Imagine you bought a mutual fund for $100 in 2014 which is now worth $400. When it is sold you are taxed on the growth in value of the investment.

Sale price	$400.00
Cost base	$100.00
Capital gain	$300.00
Taxable capital gain (50%)	$150.00

The difference between the sale price and your cost base is called a capital gain. In Canada only 50% of a capital gain is taxable, therefore only $150 would be added to the taxable income.

Donation of Securities

The benefit of donating securities directly to charity is that no taxes are paid on the capital gain as it is considered exempt from taxation when donated.

Let’s compare selling the security and donating cash vs. donating the security directly.

	Sell security and donate cash	Donate security directly
Investment value	$1,000.00	$1,000.00
Cost base	$200.00	$200.00
Capital gain	$800.00	$800.00
Taxable portion	50%	0%
Taxable capital gain	$400.00	$0
Taxes (30% tax rate)	$120.00	$0
Donation amount	$1,000.00	$1,000.00
Donation tax credit	$401.60 (40.16%)	$401.60 (40.16%)
Net cash flow	$718.40	$598.40

When you sell the security and donate $1,000 in cash the net cash flow is $718.40 ($1,000 + $120 – $401.60). When you donate the security directly to charity you save the $120 income tax on the capital gain reducing the net cash flow to only $598.40. This increases your ability to give by reducing the cost of donating.

Conclusion

Donation of securities is a great option for Canadians who are charitably minded and who have non-registered investments with capital gains. If that describes you, speak with your financial advisor or accountant about donating securities directly.

Notes

Keep in the mind this donation of securities discussion only applies to securities held in a non-registered (or open) plan and does not refer to donations of securities held in other plans such as an RRSP or TFSA.

Personal income tax filing, everyone’s favourite annual task. Right?

Most Canadians dread having to complete their taxes and with good reason. The tax code in Canada is complex and convoluted. We hope the information presented below will help you make sense of your personal income tax filing in Canada.

Due Dates

• Income taxes owing need to be paid by April 30th of the following year.
• Income tax filing is also due April 30th.
  • If you have self-employed income, then the filing deadline is June 15th. Keep in mind the amounts owing are still due by April 30th.

New for your 2022 tax return

• Repayment of Covid-19 benefits – You may have received a notice in 2021 or 2022 requiring the repayment of a portion of the Covid benefits you received. If you made a repayment in 2022 you will receive a tax slip that can be claimed to reduce your taxable income in 2022, 2021 or 2020.
• Home Accessibility Tax Credit – If you are 65 or older and are eligible for the disability tax credit you can claim up to $20,000 in Home Accessibility remodels to your home.
• Ontario Staycation Tax Credit – one time tax credit allowing you to claim 20% of your stay in an Ontario hotel, cottage or campground during 2022 up to a maximum of $1,000 individually or $2,000 as a family.

Common Tax Slips

• T4 slips – Received in February or early March
  • T4 – Employment income – Provided by each of your employers
  • T4A – Pension, Retirement, Annuity and Other Income – You will receive this if you have pension or annuity income. It is also a “catch-all” tax slip.
  • T4RSP/T4RIF – RRSP/RIF income – Withdrawals from your RRSP/RIF
  • T4A(P)/T4A(OAS) – CPP/OAS income – CPP and OAS pension income and any withholdings tax taken
  • T4E – EI benefits – EI benefits received in the year
• T5 slips – Received in February or early March
  • T5 – Investment income – Income from any non-registered investment accounts or bank accounts.
  • T5007 – Benefits – You will be issued this slip if you received more than $500 in Worker Compensation benefits, social assistance or provincial supplements.
  • T5008 – Securities Transactions – Disposals or redemptions of any non-registered investments
  • T5013 – Partnership Income – If you were invested in a partnership you will be issued this slip for any income or loss.
• T3 slip – Investment income (trusts) – Some investments (such as mutual funds) are structured as trusts and they issue T3 slips for any income distributions. These are often issued in March or early April.
• T2202 – Tuition payments – Tuition payments made in the year will be included on this slip. Issued in February or early March.
• Foreign Income – If you have income from another country, such as a foreign pension, you will need to report it on your Canadian tax return.

Common tax deductions

These are deducted from your taxable income meaning you save taxes at your marginal tax rate.

• RRSP/RPP contributions – Contributions to your RRSP or pension plan reduce your taxable income.
• Split pension deduction – Certain types of pension/retirement income can be split with your spouse, moving income from the higher income spouse to the lower.
• Union and professional dues – If you pay union or professional dues (that are not reimbursed) these can be deducted.
• Child care expenses – Payments for child care can reduce your taxable income.
• Employment expenses – If you are required to work from home, drive to clients (and not reimbursed) or paid through commission there may be an opportunity to deduct some employment costs.
• Spousal support payments – If you are paying spousal support to your ex-spouse these are deductible from your income. If you are receiving spousal support this would be taxable income.
• Carrying charges and interest – If you pay investment management fees or you pay interest on a loan used to invest you can claim that as a deduction on your return. Keep in mind this is only deductible on non-registered investments.

Common tax credits

Credits are applied against your taxes payable. In most cases they are at the lowest federal tax bracket of 15% plus your lowest provincial tax bracket. Most credits are indexed to inflation. The majority of credits are non-refundable, which means they can reduce your income taxes to zero but they cannot create a refund on their own.

• Basic personal amount – Every filer receives this deduction ($14,398 for 2022).
• Age amount – If you are age 65 or older on December 31st of the tax year you may receive an age amount deduction. It is reduced and eventually eliminated as your income level rises.
• CPP and EI contributions – You receive a credit for your personal CPP and EI contributions.
• Employment income credit – You receive a small credit if you have employment income ($1,287 in 2022).
• Home buyers’ amount – If you are a first-time homebuyer (did not live in a home you own for the tax year and 4 previous years) you get a credit of $10,000.
• Pension income amount – If you are receiving pension income you receive a maximum credit of $2,000.
• Disability amount – If you or one of your dependents have a disability please complete a disability tax credit form. If approved you would receive the disability tax credit ($8,870 in 2022).
• Tuition/education – amounts paid in tuition and education can be claimed as a tax credit. They can also be carried forward if they cannot all be used in the current year.
• Medical expenses – Only the amount in excess of the lower of:
  • 3% of your net income, or
  • $2,479 (in 2022) can be claimed.
• Donations – donations to registered charities create a credit on your tax return. On the first $200 they are credited federally at the 15% rate applicable to other credits. Any donations over that amount are credited federally at either 29% or 33% depending on your income tax level. These can be carried forward if they cannot all be claimed in the current year.

These are a selection of the most common and relevant federal tax deductions and credits. There are additional federal and provincial deductions and credits not included in the above lists.