Save taxes by donating securities in your "HoldCo"
Many Canadians have already discovered the benefits of donating securities “in kind” to get a donation tax receipt for the fair market value of the gift and, at the same time, avoid capital gains tax. Donating securities from an investment portfolio held within a holding company (HoldCo) can achieve even more.
Whether you’ve set up a HoldCo as part of an estate freeze strategy to share the growth of the portfolio with family members, or as a way to reduce probate fees on death, donating from your HoldCo is a strategy worth exploring.
How does the donation tax credit work for corporate gifts?
In Canada, when you donate cash or securities to a registered Canadian charity or other qualified donees as an individual, you receive a donation tax receipt that you can use to claim a non-refundable tax credit on your income tax return. When your corporation donates, it can use the donation tax receipt to claim a deduction from business income – reducing income in turn reduces taxes owed.
Both individual and corporate donations can be claimed up to 75% of net income in the year of donation or carry forward the credit/deduction for up to five years. Also, both individual and corporate donations of securities eliminate tax on accrued capital gains.
What happens when you donate securities from a HoldCo?
Let’s assume an example where you have a numbered portfolio holding company in British Columbia with investments that have appreciated in value, and you’d like to make a significant donation to charity.
If your HoldCo donates securities with a fair market value of $150,000 and an adjusted cost base of $95,000, here’s what happens:
- Your HoldCo will receive a donation tax receipt for $150,000 that it can use to claim a deduction against net income this year or in any of the next five years.
- The capital gain of $55,000 is exempt from tax.
- The capital gain amount is allocated to the capital dividend account (CDA), which is a notional account for tax purposes.
- The HoldCo can pay out a tax-free dividend at any time up to the amount in the CDA to eligible shareholders.
- The value of the HoldCo is reduced by $150,000, which reduces taxes due on deemed disposition or disposition on death.
So, in addition to generating a donation tax receipt and eliminating capital gains tax, donating securities from a HoldCo also boosts the CDA and reduces future taxes.
How does selling the securities and donating the cash proceeds compare to donating in kind?
Donating in kind maximizes this strategy’s tax-saving benefits because of the impact on both capital gains tax and the CDA.
| Sell shares and donate proceeds |
Donate shares in kind | |
| Fair market value of gift (a) | $150,000 | $150,000 |
| Adjusted cost base | $95,000 | $95,000 |
| Capital gain | $55,000 | $55,000 |
| Taxable capital gain | $27, 500 (50% inclusion rate) | Nil (0% inclusion rate) |
| Amount added to CDA | $27,500 (50% of capital gain amount) | $55,000 (100% of capital gain amount) |
Money saved and money earned – all in one strategy
In the above example, donating $150,000 worth of shares held within a HoldCo costs less when donated in kind due to the zero percent capital gains inclusion rate versus the 50% inclusion rate when shares are sold. In addition, twice the amount is added to the CDA and available to be paid out to shareholders as a tax-free dividend – $55,000 instead of $27,500.
Furthermore, integrating this approach with a donor advised fund (DAF), such as a Charitable Giving Fund within the Raymond James Canada Foundation, allows you to easily donate in kind, access an immediate donation tax receipt and then over time decide which of your favourite charities will receive grants from your fund.
Can you benefit from donating securities held within your HoldCo? Speak with your Raymond James Ltd. Financial/Investment Advisor and your tax professional about whether this strategy is right for you.