Example: Gifts in kind
Steve and Elizabeth rarely use their family cottage near Sylvan Lake. The Alberta couple bought the place for $60,000 in the late 1970s and, while they talked about selling it, they decided instead to donate the property to the University of Calgary.
Let’s assume the couple makes more than $315,000 a year, putting them in Alberta’s highest marginal tax bracket of 48 per cent. A property appraisal determines the current fair market value of the property to be $300,000.
Tax on the capital gain if they were to sell the cottage:
Capital gain recognized ($300,000 - $60,000) = $240,000
Taxable gain ($240,000 x 50%) = $120,000
Tax on gain ($120,000 x 48%) = $57,600
Eligible tax credit when they donate the property:
Value of property = $300,000 Charitable
Tax Credit at 50% = $150,000
Net tax savings by donating the property:
Charitable Tax credit (50% of $300,000) = $150,000
Tax on gain = $57,600
Net tax savings = $92,400
In this example, we’re assuming the couple is eligible for the 50 per cent Alberta charitable tax credit. (The first $200 of a charitable donation is eligible for only a 25 per cent charitable tax credit.) Let’s say Steve and Elizabeth have already made $200 worth of donations through the year, so they’re eligible to deduct a full 50 per cent of their donation to the University of Calgary.
The charitable tax credit may be claimed for donations of up to 75 per cent of your net income in the year of the donation, and any excess may be carried forward for five years. The limit increases to 100 per cent of net income in the year of death and the preceding tax year.
The contribution limit for in-kind gifts that have appreciated in value is 75 per cent of net income, plus 25 per cent of the taxable gain arising from the gift. This means that the contribution limit is actually 100 per cent of the taxable gain in the gift, plus 75 per cent of net income from all other sources.