Donating Securities to Charity

“Giving away money is easy. Giving away money well is fiendishly difficult.” – Warren Buffett

If you’re looking to give back to your community, instead of giving cash to your chosen charity, consider donating securities and mutual funds. This is a strategic and highly tax efficient way to satisfy your philanthropic ambitions and contribute to a cause you care about.

 
Eliminates taxes on capital gains

Capital gains occur when you sell a security at a higher price than you originally bought it for. This income, like most forms of income, is subject to taxation. By donating securities to charities rather than selling your securities first then donating the cash proceeds, however, you are able to circumvent the capital gains taxes you would have to pay the government.

For example: Let’s say that five years ago you purchased common shares in Company XYZ for $1,000. The company experienced great success and your stocks now have a market value of $5,000. That is a $4,000 capital gain. Now, if you decide to sell the stock, the CRA requires you to declare 50% of your capital gains on your tax return and pay tax on that amount. In this situation, you would have to report capital gains amounting $2,000 on your tax return. Assuming a 40% tax rate, you would be paying $800 in tax before even giving any money to charity.

If you have committed to donating $5,000 to a chosen charity and decide to sell securities and donate cash rather than donating securities, this $5,000 donation is actually costing you $5,800.

Keep in mind: The capital gain tax savings you realize from donating securities and mutual funds to charity is not a tax loophole – it’s the government encouraging you to give. When the government introduced this concept of capital-gains-free charitable giving, they were well aware that they were providing Canadians with a great tax benefit. Ultimately, the benefit that this form of charitable giving would bring society would outweigh the cost of lost tax revenue to the country.
 

Charity gets more ‘bang for your buck’

These significant tax savings frees up more money to give. This means that more of the money you are donating is going to the cause you care about – whether it is providing shelter for abandoned animals, resources for women who have experienced violence, or necessities for the homeless.

Following the same example above, if you sell your shares of Company XYZ that have a market value of $5,000, pay the capital gains taxes, and donate the rest – the charity is only receiving $4,200. If you donate the securities, however, the charity will receive the full $5,000 amount.

Depending on the age, size, and established mechanisms of the charity you choose to support, the organization may not have the ability to process securities donations. If this is the case, there are several companies whose main function is to process and disseminate your securities donation to a specific charity or a pool of charities of your choosing.

 
Greater charitable tax deduction

While receiving a charitable tax deduction is not typically the main motivation for giving back to your community, it is certainly a welcome by-product.

When you make a donation to any registered charity, you receive a tax receipt. When tax season rolls around, the CRA will give you a tax credit dependent on the amount you have donated that will help to reduce your total tax liability. In Canada, your federal tax credit is 15% for the first $200 you donate, plus 29% for any amount above the first $200.

When donating securities and mutual funds, as opposed to cash, you will receive a tax credit for the fair market value of the donation at the time it was given. If you sell your securities first and then donate the after-tax money, your charitable tax deduction will be less due to the lower amount donated.

Continuing with the example: with the donation of $5,000 worth of securities, you will receive a $1,422 tax credit:  (15% X $200) + (29% X $4,800) = $1,422

Alternately, selling $5,000 worth of securities, paying $800 in capital gains tax, and then donating the remaining proceeds would result in a tax credit worth $1,190. (15% X $200) + (29% X $4,000) = $1,190
 

Additional things to consider

If the security you are donating is now worth less than you previously bought it for, therefore it is a capital loss, it might be a better idea to sell the stock first and then donate the cash. This is because selling a stock at a capital loss can be used to offset capital gains in the future and the associated taxes.

While you can put charitable donations in you or your spouse`s name, it is generally more tax-effective to put it in the name of the higher-earning partner as they fall into a higher tax bracket and are subject to greater tax liability. Because charitable tax credits are classified as non-refundable credits, and thus can’t be used to reduce total tax liability below zero, putting the donation in the higher earning partner’s name ensures that you get the most from your tax break.

Lastly, if you are choosing between several different securities to donate, choose a highly appreciated stock that has the largest capital gain. This will maximize your tax savings because of the zero percent inclusion rates when donating securities.
Note: securities eligible for donation must be held in non-registered accounts, rather than registered accounts such as RRSPs, RESPs, and TFSAs.
 

The advantages of donating securities rather than cash are apparent. Not only do you eliminate the taxes you would have to pay on capital gains and receive a larger tax credit, but more of the money you donate actually goes to supporting the cause you care deeply about. Please don’t hesitate to reach out to any of our team members at Bongard Wealth Advisory Group if you would like more advice.