By Malcolm Burrows
May 14, 2025
This article was originally published here: https://enrichedthinking.scotiawealthmanagement.com/2022/07/15/the-benefits-of-in-kind-donations-of-public-securities-from-holding-companies/
Many investors with appreciated public securities in their portfolios are increasingly choosing to make charitable donations “in-kind” rather than giving cash. It’s a simple, tax-effective way to donate, enabling them to avoid realizing large capital gains and other tax advantages.
The donor may be an individual or a corporation – typically an investment holding company that is a Canadian-Controlled Private Corporation. Once the in-kind donation is made, the charity issues a tax receipt equal to the securities’ fair market value.
As we mentioned, an in-kind donation of appreciated public securities can provide tax benefits for holding companies – including:
- A tax deduction for the fair market value of the donated securities. The deduction reduces the overall taxes payable by the corporation at the corporate tax rate, which may be up to 54%, depending on the province.
- Nil capital gains. Unlike a sale of securities, a donation is exempt from capital gains tax. This can provide tax savings of up to 27%. The value of the saving depends on the amount of capital gain and the province.
- Tax-free dividend. The full value of the capital gain associated with the donation of securities may be added to the corporation’s Capital Dividend Account (CDA). The CDA enables a tax-free distribution to shareholders, which means no dividend tax is paid.
A donation may be claimed against up to 75% of corporate income in the year of the gift. Any unused donation amount may be carried forward for up to five years and claimed against up to 75% of income.
Here’s an example:
George and Tejal Singh have an investment holding company, ABC Investments Inc., with a $10 million portfolio of public securities, primarily common stock. The company’s annual income is $400,000, primarily from dividends and capital gains. The corporation owns 10,000 shares of a successful tech company, purchased for $100,000 with a fair market value of $500,000. George and Tejal would like to make a $100,000 donation to charity. The company has a tax rate of 50%. The following table compares a donation of cash derived from the sale of securities versus an in-kind donation.
Donation of cash from securities sale vs. in-kind donation*
| Sell securities and donate cash | Donate securities in-kind | |
|---|---|---|
| Donation | $100,000 | $100,000 |
| Adjusted cost base | $20,000 | $20,000 |
| Capital gain | $80,000 | $80,000 |
| Taxable gain at 50% | $40,000 | 0 |
| Tax on gain at 50% (a) | $20,000 | 0 |
| Tax deduction for donation at 50% (b) | $50,000 | $50,000 |
| Capital Dividend Account amount | $40,000 | $80,000 |
| Cost of gift (a + b) | $70,000 | $50,000 |
| Tax-free capital distribution to shareholders | $40,000 | $80,000 |
*For illustration purposes only
In-kind donations can offset sales
If you choose to sell a highly appreciated public security and donate cash instead of donating securities in-kind, it might be helpful to combine the sale with an in-kind donation within the same fiscal year.
Typically, a donation of approximately 30% will offset the capital gains tax on the balance of a position. Depending on the amounts, all or part of the sales proceeds may be distributed tax-free to shareholders via
a CDA.
