Charitable Giving and Tax Planning

Most charitable giving begins with a personal connection.  It could be a hospital that cared for a family member, a school that made a difference, a cause that simply matters. That is as it should be. Tax should not be the reason to give. But once a family has decided to give, how they give can matter considerably.

For families with non-registered investment portfolios, private corporations, registered accounts, or an upcoming liquidity event, charitable giving deserves a place in the broader tax and estate plan. Whether a gift is made in cash or securities, personally or corporately, during life or through the estate, each choice carries different tax consequences.

When Cash Isn’t the Best Asset to Give

Most donations are made in cash, and for regular annual giving that is usually fine. But for larger gifts where a family holds a non-registered investment account with significant unrealized gains, donating securities directly to a registered charity is often more tax-efficient than selling first and donating the cash. This can apply to shares listed on a designated stock exchange, mutual funds, and exchange-traded funds.

When eligible securities are donated in-kind, the donor receives a charitable receipt for the full fair market value, and the capital gain on those securities is subject to a zero-inclusion rate.  This means it is not included in taxable income at all. The charity receives the same value, and the donor avoids the capital gains tax that would have applied on a sale.

How the numbers work

Consider an investor holding shares worth $100,000 with an adjusted cost base of $40,000. Selling and donating the after-tax proceeds means capital gains tax reduces what the charity receives. Transferring the shares directly instead means the charity receives the full $100,000, the donor receives a receipt for $100,000, and the $60,000 capital gain is not subject to regular income tax. For families with large, embedded gains in taxable portfolios, this is one of the most useful charitable planning tools available.

The AMT Wrinkle

This strategy remains attractive, but the full picture requires looking beyond regular tax rules. The Alternative Minimum Tax (AMT) is a parallel tax calculation that took on more relevance for donors starting in 2024. While the zero-inclusion rate on donated securities still applies for regular tax purposes, 30% of the capital gain is now included in adjusted taxable income for AMT purposes. In addition, only 80% of the charitable donation tax credit is recognized in the AMT calculation, down from 100% previously.

In many cases, donating securities in-kind will still produce a better result than selling and donating cash, even after factoring in AMT. But for larger gifts, particularly where the donor also has significant capital gains, stock option income, flow-through shares, or other AMT-sensitive items in the same year, the AMT calculation should be reviewed before the gift is made.

Timing the Gift

A charitable gift tends to be most tax-efficient in a year when income is unusually high:  when a taxpayer has a business sale, a large capital gain, a significant RRIF withdrawal, a major corporate dividend, or the disposition of a concentrated investment position. For retirees, giving may also interact with OAS clawback and pension income; for business owners, with salary, dividends, shareholder loans and corporate investment income. The key questions are not only how much to give, but when to give, which asset to give, and where the donation should be claimed.

Annual Limits and the Five-Year Carryforward

Eligible donations can generally be claimed up to 75% of net income in a given year, rising to 100% in the year of death and the immediately preceding year. Unused amounts can be carried forward and claimed in any of the following five years.  This is useful where a large gift generates more credit than can be absorbed in a single year.

A donor-advised fund can also be useful in this context. It allows a family to make a larger charitable contribution in a high-income year, receive the donation receipt now, and then recommend grants to specific charities over time. For families that want some structure but do not want the administration of a private foundation, this can be a practical middle ground.

Personal vs. Corporate Giving

For incorporated families, one question that often gets missed is whether the donation should be made personally or through the corporation.

A personal donation generates a donation tax credit. A corporate donation generates a deduction against corporate income. Where a corporation donates appreciated publicly traded securities in-kind, there is an additional benefit: because the capital gain on the donated securities is entirely tax-free, the full amount of that gain is added to the corporation’s capital dividend account (CDA). A positive CDA balance can then be paid to shareholders as a tax-free capital dividend.

This is a technical area, and the right answer depends on corporate and personal tax rates, available cash, investment holdings, shareholder needs, and the broader compensation and distribution strategy. The main point is that incorporated families should compare the alternatives rather than assume the gift should automatically be made personally.

Estate Planning Opportunities

Charitable giving can also be coordinated with the estate plan.

Death can trigger significant taxable income, including deemed dispositions of capital property and full income inclusion of RRSPs or RRIFs unless a qualifying rollover is available. Charitable gifts made by will, by beneficiary designation, through life insurance, or by the estate may help offset some of that tax.

The planning should be deliberate. The will, beneficiary designations, registered account structure, estate liquidity, tax filings and intended gifts to family members should all be reviewed together.

Planning Gaps to Avoid

• Selling appreciated securities and donating cash, rather than first considering an in-kind donation;
• Making a large gift without considering AMT;
• Making a large donation in a low-income year without considering whether the claim should be carried forward;
• Failing to coordinate donations with a business sale, capital gain, RRIF withdrawal or corporate dividend;
• Donating personally when a corporate donation may have been more efficient, or vice versa;
• Assuming a private foundation is required when a donor-advised fund may be simpler;
• Leaving charitable gifts in a will without coordinating the tax result with the rest of the estate plan;
• Failing to confirm that the recipient organization is eligible to issue an official donation receipt.

Final Thoughts

Charitable giving should begin with the causes a family cares about. That part is personal and should stay that way. The execution, however, should be practical. The asset donated, the timing, the donor, and the structure can all meaningfully affect the outcome for the charity and the family’s tax position.

For families with non-registered portfolios, private corporations, registered assets, significant embedded gains, or an upcoming liquidity event, charitable giving should be a coordinated part of the broader wealth plan. Done thoughtfully, it can support the causes that matter most while also reducing the overall tax cost for the family.

Important note: This article is for general information only and should not be relied upon as tax, legal, accounting or financial planning advice. Charitable giving strategies, including gifts of securities and AMT implications, should be reviewed based on each family’s specific circumstances.