My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, August 22, 2022

The Best of The Blunt Bean Counter - The Tax Benefits of Donating Stocks to Charities

This summer I am re-posting the "best of" The Blunt Bean Counter blog while I work on my golf game (for some reason there seems to be a negative relationship between my age and my handicap). Today, I am re-posting a May 2021 blog titled "The Tax Benefits of Donating Stocks to Charities". 
 
I have edited this preamble, as the original blog post had a few paragraphs discussing the unusual congruence of capitalism and altruism in relation to the Reddit WallStreetBets group. As you may recall, capitalism (at it's worst or best depending upon your view) was on display as many members of the WallStreetBets forum made astronomical amounts of money on the shares of GameStop, AMC etc. when they "squeezed short sellers". Yet, altruism was also on display, as there were many stories of the Reddit users making large donations with their profits and urging others to do likewise. 
 
Speaking of charity and kindness, the Canadian Income Tax Act is surprisingly altruistic. It provides for charitable giving while at the same time providing income tax benefits. This is especially true where you donate publicly listed securities with unrealized capital gains to your charity of choice. Today, I will discuss the benefits of a donation of publicly listed securities to a charity versus a cash only donation.

Donation of Cash


If you donate cash to charity, you can claim a donation credit of up to 75% of your net income. Where an individual makes a charitable donation of cash, there is a federal non-refundable tax credit of 15% on the first $200 of donations. For donations in excess of $200, the non-refundable tax credit increases to 29%. In addition, the provinces provide provincial tax credits.

In Ontario, my home province, the actual tax savings for a donation range from approximately 40% (if your net income is around $50,000) to 50% (if you are a high-rate taxpayer) of your actual donation, for any donations in excess of the $200 limit. Thus, from a cash perspective, your donation only costs you 50-60% of what you actually donate to the charity. A good deal for all parties.

Donation of Public Securities


For those of you sitting with large unrealized capital gains on public securities, a donation of these shares is more tax effective than a donation of cash from the after-tax sale of your shares (this applies to non-registered account donations only, not RRSPs etc.). This is because when you donate public securities listed on a prescribed stock exchange, the taxable portion of the capital gain is eliminated, and the net after-tax cost of the donation is reduced substantially.

For example, if a high-rate Ontario taxpayer sells a stock for a $10,000 gain (say the proceeds were $12,000 and the cost was $2,000), they would owe approximately $2,700 in income tax on the capital gain in the following April. If they donate the gross proceeds of $12,000, the donation would result in income tax savings of approximately $6,000 when they filed their return. The net after-tax cash cost of the donation is approximately $8,700 ($12,000 cash donation + $2,700 tax owing - $6,000 tax credit).

However, if the taxpayer donated the stock directly to a charity, the organization would receive $12,000, the taxpayer would receive a refund of approximately $6,000, and they would owe no taxes on the capital gain, making the net after-tax cash donation cost only $6,000.

Clearly, where you have a stock or bond you intend to sell and you plan on donating some or all of the proceeds, a direct contribution of the security to a charity is far more tax efficient. Most charities make the process relatively pain-free (note: as a reader commented in my original post, you can also make donations to public foundations).

Donation of securities from a private corporation


Canadian-controlled private corporations (CCPCs) can be taxed in various ways, so I am not going to get into the ins and outs of donating. However, one thing to consider when deciding whether to donate personally or corporately is that for most CCPCs, they will be able to add 100% of the capital gain ($10,000 in the example above) to their capital dividend account (CDA) and get this money out to you and/or the other shareholders tax-free (assuming there are no negative attributes to the CDA account). For a detailed discussion of the CDA, see this blog post.  In all cases, please speak to your accountant so they can help you determine whether to make a personal or corporate donation.

While the markets have not been very good in 2022, you may still have several marketable securities with large unrealized gains due to the strong markets of the last few years. Consider donating some of these shares to help a good cause. You will help make the world a better place and as an added bonus, you will reduce your taxes.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, August 8, 2022

The Best of The Blunt Bean Counter - Inheriting the Cottage/Cabin/Chalet –The Great Estate Planning Challenge

This summer I am re-posting the "best of" The Blunt Bean Counter blog while I work on my golf game. Today, I am posting a November, 2014 blog titled "Inheriting the Cottage/Cabin/Chalet - The Great Estate Planning Challenge. While this post is almost eight years old, it is still relevant today and what better time to contemplate the future use of your cottage than while you are spending time there. 

This blog post was written by my most popular guest poster, Katy Basi. Katy has guest posted such BBC favourites as Qualifying Spousal Trusts - What are They and Why do we Care?, a three part series on new will provisions for the 21st century dealing with your digital life, RESPs and reproductive assets and Alter Ego Trusts and Joint Partner Trusts - A Primer. Without further ado, here is Katy!

Inheriting the Cottage/Cabin/Chalet –The Great Estate Planning Challenge 

By Katy Basi


From my lovely vantage point on the dock at my dad’s cottage, looking around the lake at all of the other family cottages, I’m reminded that every cottage, cabin and chalet has a story. Some have been in the same family for generations, with or without accompanying drama. Too many more were sold to a third party against the expectations of the family, often as a result of poor estate planning.
 
The family vacation home can be the Cyanean Rocks against which an estate plan crashes and sinks. (The Cyanean Rocks, aka the Symplegades, were a pair of rocks at the Bosphorus that moved, causing major problems to boats in the area until Jason and the Argonauts defeated the rocks). There are many factors that make planning for this property more challenging than for other assets. For example:
  1. Often the legal ownership of a cottage does not reflect the practical reality of the cottage situation (for the remainder of this blog, I will refer to the “cottage” as this is the term commonly used in Ontario, but no disrespect is intended to owners of cabins and chalets - many of the same principles and problems will apply!) Due to the inter-generational history of many cottages, cottage ownership is often just not as simple as ownership of a primary residence. I have seen cottage ownership being shared between siblings, or divided among parents and all of their adult children. Sometimes a child is on title “but everyone understands that the cottage belongs to mom”. A parent may own only a “life interest” in the cottage, with adult children holding the “remainder interest”. Other times, ownership was transferred to a trust in the misty reaches of time. If a trust owns your cottage, you’ll want to read my companion blog next week entitled “Cottage Trusts” to ensure that you are aware of some nasty tax traps with the cottage trust structure.

  2. If an owner spends any time at a cottage with his/her family, the cottage will qualify as a matrimonial home for family law purposes, and may therefore be shareable upon a later separation or divorce of the owner (unless there is a marriage contract in place which addresses this issue). Let’s say, for example, that in your Will you leave your cottage to your son Adam and your daughter Beth as 50/50 tenants in common (not as joint tenants, as you want Adam’s children to be able to inherit his 50% interest if Adam so chooses). You shuffle off of this mortal coil, so that Adam becomes a co-owner of the cottage. Adam spends a week a year at the cottage with his wife and two children. Adam then separates, and his wife makes a claim for 50% of Adam’s 50% interest in the cottage on the basis that it is a matrimonial home. Will Adam be able to pay 25% of the value of the cottage to his ex as part of the settlement? Will he need to sell his interest in the cottage to Beth to provide the funds for this payment? If Beth cannot afford to buy Adam’s share, this issue may result in the sale of the cottage to a third party. Leaving the cottage to your beneficiaries in a cottage trust created in your Will may be helpful in this respect if marriage contracts are not doable (this planning technique is discussed in more detail in my “Cottage Trusts” blog).

  3. Cottages are expensive to maintain. Not every beneficiary who wants the cottage can afford the upkeep, and not every beneficiary who can afford the upkeep wants the cottage.

  4. Family members often have strong emotional attachments to the cottage. Leaving the cottage in your Will to the child with the financial resources to maintain the cottage may be the smart choice from a monetary perspective, but if this decision leads to lifelong conflict between the cottage child and the non-cottage child, it may not be the best plan taking all considerations into account.

  5. Cottages are not divisible in the same way as financial assets. Cottage owners who intend to leave the cottage to more than one person need to ask themselves what the practical implications are of each beneficiary inheriting only a share of the cottage. For example, co-ownership agreements are strongly recommended whenever more than one person or family shares ownership of a cottage. These agreements can provide for the payment of maintenance expenses and utilities associated with the cottage, allocation of time at the cottage, “shared time” (everyone is welcome!) versus “private time” (my family only please…), policies on having pets/friends over to stay (allergies? replenishment of beverages required?), bringing household items to/taking household items from the cottage, etc.

  6. If the cottage owner has owned the cottage for a number of years, there is often a large accrued capital gain on the cottage that is triggered upon the owner’s death. If the owner does not have sufficient liquid assets to pay the tax, and the beneficiaries do not have the funds, the cottage must often be sold simply to pay this tax bill. Insurance on the life of the owner is often recommended, where available at an affordable premium, to backfill this monetary gap. Sometimes a beneficiary is given the cottage in the Will upon the condition that the beneficiary pays the related capital gains tax, saving the other beneficiaries of the estate from bearing part of this burden. The calculation of the capital gain is often complex due to shoeboxes of receipts, collected over decades, which may or may not affect the adjusted cost base ("ACB") of the cottage, as well as principal residence issues (sometimes a cottage may be designated as a principal residence for certain years of ownership….and sometimes not!)
If you own a cottage, it is strongly recommended that you speak with a professional to ensure that your cottage estate plan is optimized. My sisters and I spent lots of idyllic summers at my dad’s cottage as children, and we’re very lucky to still be able to enjoy the cottage, and the memories it holds for us, to this day. I hope that I’ve helped my family create an estate plan whereby my children, and my nieces and nephews, will be just as fortunate, and I wish the same for you.

Katy Basi is a barrister and solicitor with her own practice, focusing on wills, trusts, estate planning, estate administration and income tax law. Katy practiced income tax law for many years with a large Toronto law firm, and therefore considers the income tax and probate tax implications of her clients' decisions. Please feel free to contact her directly at (905) 237-9299, or by email at katy@basilaw.com. More articles by Katy can be found at her website, http://www.basilaw.com/

Other Cottage Blog Posts by The Blunt Bean Counter 


Over the years I have written a couple other blog posts on cottage related topics. They include: 
 
Transferring the Family Cottage - Part 1,  Part 2, Part 3

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues.
 
This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.