ScotiaMcLeod recently published an insightful bulletin concerning tax-effective donations of public securities. What follows is a summary of their observations:
When you donate appreciated public securities to a Canadian registered charity you receive two tax savings: 1) a tax credit that is typically equal to the highest marginal tax rate; 2) no capital gains tax on the disposition. Combined, these savings make appreciated securities the most tax-effective way to give a simple donation.
Several publicly traded securities qualify, including appreciated stocks and trust units. It is possible to donate bonds, futures and options, and shares or units in mutual funds. The incentive also applies to gifts of public securities obtained through employee stock options and to unlisted exchangeable shares – as long as the gift is made within 30 days of the exercise or exchange.
These tax savings may increase the amount you can afford to give, or simply reduce the out-of-pocket expense of your gift. Corporations (which receive tax deductions, not credits) are also eligible for this incentive. The table below compares the tax consequences of donating cash proceeds of sold securities versus donating securities in-kind. The marginal tax and tax credit rates are assumed to be 45% for the purposes of illustration.
|Sell Security & Donate Cash||Donate Security|
|Value of security/donation||$100,000||$100,000|
|Cost of security||$50,000||$50,000|
|Taxable capital gain @ 50%||$25,000||$0|
|Tax on gain @ 45%||$11,250||$0|
|Charitable tax reciept||$100,000||$100,000|
|Tax credit @ 45%||$45,000||$45,000|
|Net tax savings||$33,750||$45,000|
Donations of public securities must be transferred in-kind. Typically the security is transferred electronically to the charity’s brokerage account. The receipt is based on the closing price of the security on the day of receipt. Most charities sell the security upon receipt to ensure the value of the gift is realized immediately. If I can help you clarify any of the issues raised by this bulletin, contact me.
Geoff Funke, Senior Wealth Advisor, The Funke Group, 604.535.4721.