Olev Edur answers your questions about your rights, personal finance, and estate planning
Question: I’m a 68-year-old widower. Comfortably retired, I’ve been making sizable cash donations to my three favourite charities every year. I recently came across the term “in kind” used in reference to charitable giving. I understand that it means you can simply gift an asset rather than having to sell it and give cash, but how is this any different from an ordinary gift? Is there some special tax treatment?
Answer: Giving gifts “in kind” can indeed have significant implications.
When it comes to your own finances, you can usually transfer investments such as stocks, bonds, and mutual- fund units in kind directly from an investment account into an RRSP or TFSA, and vice versa. Doing so saves you (and your institution) the trouble and cost of selling and then rebuying the same investments.
For tax purposes, an in-kind transaction is deemed to take place at an asset’s fair market value (FMV), rather than at whatever price an actual sale might obtain. In-kind RRSP contributions or RRIF withdrawals, for example, would be based on FMV, as would in-kind TFSA contributions or withdrawals.
A charitable gift in kind takes place at FMV for the purpose of claiming your donation tax credit on your income tax return. Normally, when a capital asset— essentially anything with a fluctuating market value—is sold, capital gains tax will be levied on any increase in its value while you owned it—but not when it comes to in-kind donations. You may, for example, want to donate a tranche of securities that you have owned and watched grow for decades. Normally, the accrued gains could result in a four- or five-digit tax bill, depending on the amount of the gain, even though capital gains are taxed at half the rate levied on normal pension or work income.
But if you donate the securities in kind, this tax would be zero. In other words, you get to use the full FMV as a donation tax credit and pay no tax on any gains that accrued while you owned the asset(s).
Bear in mind, however, that an annual limit of three- quarters of your net income applies to this tax credit. And if you’re a high-income donor, you might want to talk to your financial adviser about the effect of the new Alternative Minimum Tax rules introduced in 2023.
A parallel tax structure aimed at higher-income taxpayers, it excludes some credits and deductions and could significantly reduce the amount of credit accorded to your donations.
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