Donate Securites to Save Tax Dollars

In yesterday’s post, I mentioned that donating securities to a charity can offer some attractive tax benefits. A reader wrote and asked me a few questions about this, and my long winded response quickly began to look like a nice blog posting for anyone else who may be interested in this topic.

In Canada, donations to registered charities, whether in the form of cash or property such as securities, are generally eligible for a tax credit. On your first $200, you get a federal tax credit of 15% as well as a matching provincial tax credit, basically giving you a benefit equal to the lowest marginal rate. However, on any donations in excess of $200, you get an increased tax credit equal to the highest marginal rate. The actual value varies from province to province based on tax rates and the credits offered by each province.

Donating securities gives you the same tax credit as if you had donated cash. Since 2006, there is an additional benefit to donating from your portfolio rather than you wallet- you avoid taxation on any capital gain. Normally, you would pay tax on 50% of any appreciation in value, but when the shares are donated to an eligible charity you get an inclusion rate of 0%. In other words, your capital gain is tax free. The practical result of this is that a donation of appreciated securities will ultimately cost you less than a cash donation in the same amount, as you enjoy the same donation tax credit but avoid the eventual capital gain taxation. The extent of the benefit will vary based on your tax rate and the amount of your capital gain, but it can become significant.

Here’s a simple example- let’s say you want to donate $1,000 to The Human Fund, a (purely fictional) eligible charity. Let’s also assume that you live in Newfoundland & Labrador and have a marginal tax rate of 42%. If you donate $1,000 cash, you will receive a tax credit valued at 42% x $1,000.00 = $420.00, so your net cost of donating is $640.00. If you choose to donate shares worth $1,000.00 instead, you still get this $420.00 tax credit, but you also get to avoid any future capital gains on those shares. If the shares have an adjusted cost base of $800.00, the normal capital gain would be (50% inclusion rate x $200 capital gain= $100.00) x 42% marginal tax rate = $42.00. Your ultimate cost of giving is now just $598.00. The larger the donation and the larger the capital gain, the greater the difference.

However, this 0% inclusion can also work against you- just as you don’t have to include any capitals gains on donated securities, you can’t claim the capital losses. Accordingly, if you’re looking to donate shares that have depreciated you’ll do better by selling the shares, claiming the capital loss, and donating the proceeds. By doing so, you’ll still get the donation tax credit but also get to offset any capital gains you may have with a capital loss.

If you’re looking for an efficient way to donate to your favourite charity this year, a donation of stocks that have appreciated in value may be an excellent option.

As always, you should conduct your own research on consult your own advisors before acting on anything you read on the interweb.

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