Donating shares from an RRIF

I have shares in my tax-free savings account and registered retirement income fund that I want to donate to charity. My broker said I would first have to transfer the shares in-kind to my non-registered account, which would be considered a sale, and I would therefore have to pay income tax. Is this true? Also, if I sell some other stocks in my non-registered account at a loss, can I use the loss to offset my taxes?

Your broker is correct that you must transfer the shares to a non-registered account before you can donate them. Alternatively, you could sell the shares and withdraw the cash to make a donation. However, there seems to have been some miscommunication with your broker regarding the tax implications.

When you make a withdrawal from your TFSA – whether in-kind or in cash – there are no tax consequences. However, if you make a withdrawal from your RRIF the value of the withdrawal is added to your income and taxed. This is probably the tax your broker was referring to.

Keep in mind that, if the value of your RRIF withdrawal exceeds the government-mandated minimum percentage based on your age, your broker will withhold tax on the excess. The tax withheld will be credited toward your taxes payable when you file your return. The tax withheld varies based on the amount of the withdrawal.

From a tax perspective, then, given the choice between donating assets from a TFSA or RRIF, you would be better off withdrawing shares (or cash) tax-free from your TFSA, rather than making a taxable withdrawal from your RRIF.

To answer your second question, if you withdraw shares (or cash) from your RRIF, you can’t use a capital loss from the sale of stocks in a non-registered account to offset tax on the RRIF withdrawal. A capital loss can only be used to offset capital gains. The loss must first be applied to capital gains in the current year; any unused losses can be carried back up to three years or forward indefinitely to offset capital gains in those years.

That being said, you can likely use the value of the donation receipt to offset some or all of the tax on the RRIF withdrawal, said Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth Management.

Depending on the province or territory, your gift would produce a charitable tax credit worth at least 40 per cent of the donation amount. This assumes you have already made $200 in charitable donations, as the charitable tax credit is significantly higher above this threshold.

“In many cases, especially with seniors in low or middle tax brackets, once someone is donating more than $200 a year, the value of the donation credit actually exceeds the tax payable on the RRIF withdrawal, resulting in excess tax credits which can be used to reduce taxes payable on other income, such as Old Age Security and Canada Pension Plan benefits,” Mr. Golombek said.

Finally, you may wish to investigate a third option: If you hold stocks that have appreciated in value in a non-registered account, consider donating them to charity. When you donate listed securities or mutual funds that have appreciated in value, you don’t have to pay any capital gains tax.