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Donations of Depreciated Securities
With the recent economic downturn, many have found that their investment portfolios have declined in value. While this is always unfortunate, it does present an opportunity to charitable donors to make the most of their losses by donating depreciated securities so as to crystallize their losses, which can be used to offset certain past and future capital gains, and claim an official donation receipt for an immediate tax benefit.
Where a donation of depreciated securities is made to a registered charity, the donor receives an official donation receipt in the amount of the fair market value of the gift, thus allowing the donor to claim a charitable tax credit immediately. Although the fair market value of the gift will naturally be lower than if the donor waited for the value of the securities to rise, a second benefit occurs on the donation of depreciated securities which may be advantageous to the donor - particularly if the donor has realized substantial capital gains in the past three years, or foresees such gains in the future. The donation of securities will trigger a capital loss, which may be used to offset both past and future capital gains. The Income Tax Act allows capital losses to be carried back up to three years, and to be carried forward indefinitely. Thus, by triggering an immediate loss on the donation of securities, the donor crystallizes a loss that will be available to reduce capital gains tax in the future.
It is also possible for the donor to repurchase the same securities after waiting the statutorily prescribed 30-day period (if the donor repurchases the securities prior to the expiration of this period, the Income Tax Act deems the loss on the initial donation to be nil). Depending on the value of the securities on repurchase, the donor may be able to acquire the identical securities at a lower adjusted cost base, thus creating the possibility of greater gains in the future. The capital gains that arise on the subsequent sale of these shares can be avoided if these securities are instead donated to a charity. Although there is some risk in this approach, as the value of the securities after 30 days is difficult to predict, the potential benefit makes this option worth considering.
Miller Thomson's Charities and Not for Profit lawyers can assist in structuring such donations and ensuring that all relevant rules are complied with. |
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