Donate To Your Favourite Charity - And Save Taxes, Too!

Thanksgiving is over and even those we many still have leftovers in the fridge, the attention of many Canadians now turns to the Christmas season. In the spirit of the holiday season, you may think about 'gifting' your favorite charitable organization with a donation. That's a very kind and generous act, especially during a time of the year that can get pretty expensive.

So why not give a little gift to yourself - by reducing your income tax bill while contributing to a worthwhile cause. It's simple: instead of giving cash, give securities and you'll likely enhance the tax benefits of your donation.

Here's how it works: Tax rules make it possible for most donations of securities to registered charities and public foundations to escape capital gains taxation. For example:

You want to donate $10,000 and you have the choice of making the donation in cash or mutual fund units. Let's assume your marginal tax rate is 46 per cent, and you originally paid $4,000 to purchase your fund units which are now worth $10,000.

If you donate the cash, you can claim the charitable donation income tax credit for the entire amount, generating $4,600 in tax savings and reducing the net cost of your donation to $5,400.

You'll still have your mutual fund units, of course - but you'll probably pay tax on capital gains when you sell them. If you sold them now, you will realize a $6,000 capital gain which will generate a tax bill up to $1,380 (50 per cent of the capital gain of $6,000 multiplied by your 46 per cent marginal tax rate.)

Instead of donating the cash realized from the sale of your mutual funds, you donate your fund units to charity. You still get the charitable credit for your donation of $10,000 mutual fund units and the resulting $4,600 in tax savings - but you will have avoided paying the $1,380 in capital gains tax on the appreciation of value of those units because you made an 'in-kind' donation to the charity.

There are other tax-saving/donation options and a professional advisor can help you decide which are best for you. But remember, you need to act before December 31st to claim a tax credit for the 2009 tax year.