Donating appreciated securities
Donating appreciated securities or mutual fund units is an efficient way to give charitably to qualified donees.[1] Rather than selling the appreciated securities and having to pay capital gains on the sale, since 2006[2] it has been possible to transfer the actual shares to the charity, without selling them and therefore no capital gain is triggered as the capital gains inclusion rate for such donations is effectively zero. You get a tax receipt for the full value of the donated security. This allows you to give more.[3][4] This concept only applies to securities held in non-registered accounts.
Transferring the whole position
In a first scenario, you want to make a charitable gift, but you don't have cash in hand. However you have some shares or mutual fund units that have gone up in value. You can transfer the shares or units in kind to your favorite charity. They will issue a receipt for the fair market value of the securities. You will then get a non-refundable tax credit (to use against other income for the year, up to a limit). With regards to capital gains, you have to declare the gain on Schedule 3 - Capital Gains (or Losses). But then you deduct the gain on form T1170 "Capital Gains on Gifts of Certain Capital Property" so the net capital gain becomes nil.
In a second scenario, you have shares on which you don't really know the adjusted cost base, perhaps because dividends have been reinvested for many years. Donating them in kind makes that problem go away, since the exact ACB does not really matter.[5]
Transferring only a portion
In a third scenario, you have a position that is trading far above the purchase price, and you are worried that of you sell it, there will be a large tax bill. You can donate a portion in kind to charity and sell the rest of the shares on the market and keep the proceeds, perhaps to diversify your portfolio, or to spend during retirement for example. The tax credit from the charitable gift will offset the tax on capital gains on the portion you sold yourself and kept. The reason this works is that "the charitable tax credit is worth twice, or more, than the tax that applies to investment profits".[6] See this calculator to figure out the required ratio.[7]
The same strategy can be used for estate planning purposes and mentioned in the will.[5] Or an entire position could be sold by the estate to reduce the overall tax bill; in this case, it is suggested to use the position with the highest capital gain.[8]
In you have cash in hand that you were planning to give to the charity anyway, and you also have appreciated securities that you wish to continue to hold, there is a different strategy available. Transfer the appreciated shares in kind to charity and immediately repurchase the shares on the market, with the cash. You will reset the adjusted cost base to the current value, eliminating a future tax liability. And of course the charity gets the gift, and you get the donation tax credit.[9] As Golombek writes, "there is no superficial gain rule"![9]
Capital losses
If you have securities currently trading below the adjusted cost base, there is no tax advantage in donating them in kind to a charity. The result will be the same as selling the securities yourself in your non-registered account (which is simpler and probably cheaper) and donating the cash proceeds to charity. In both cases, you will trigger a capital loss, and you will get a non-refundable donation tax credit.[10]
Practical details of transferring securities
It can be very difficult, if not impossible, for securities to be transferred in the last week of December. Trying to do so risks the possibility that the donation receipt will be dated in the following year.[3]
Your charity has a broker
FWF member Bylo Selhi writes:
- Most discount brokers will transfer shares from your account to the charity's account without charging the usual ~$50 transfer fee. If you plan to donate shares contact the charity and ask them how to do it. They'll give you the information about their broker that you'll need to give to your broker.[11]
Your charity can't accept securities
If this normal method does not work, for example because the receiving charity is small and does not have a broker, an option is to use canadahelps, which is itself a registered charity. You transfer the shares in kind to them. They will sell the shares and forward the proceeds to your chosen target charity. However, Canadahelps will deduct a 2 to 3% fee depending on the value of the shares donated.[12]
Questions from CRA
It is common to have the Canada Revenue Agency (CRA) ask for copies of the charitable gift receipts a few months after you file a tax return electronically. This is routine, not an audit. One option to provide the requested documents is to upload a PDF on CRA's "MyAccount".[5]
References
- ^ "Charities and giving glossary". Canada.ca. Retrieved April 21, 2021.
- ^ "The Budget Plan 2006" (PDF). Department of Finance Canada. p. 230. Retrieved April 21, 2021.
- ^ a b taxtips.ca, TaxTips.ca - Donating Capital Property can Eliminate Capital Gains, viewed April 18, 2021.
- ^ Tim Cestnick, Donate securities to charity (and be a bit of a tax Scrooge), December 12, 2012, viewed April 18, 2021.
- ^ a b c Financial Wisdom Forum post: "Re: Doing Well by Doing Good [Donate Securities to Charity]", Bylo Selhi. 21 April 2021
- ^ Toronto Star, Giveaway of stock can keep taxes at bay, December 20, 2007, viewed April 18, 2021
- ^ Libra Investment Management, Doing Well by Doing Good, viewed April 18, 2021.
- ^ Paul Brent, Win-win tax strategy: donating stocks to charity, The Globe and Mail, March 24, 2017, viewed April 22, 2021.
- ^ a b Jamie Golombek, Help clients plan for tax-efficient charitable givingInvestment Executive, December 11, 2020, viewed April 20, 2021.
- ^ RBC Wealth Management, Charitable donations of securities, November 2017, viewed April 20, 2021.
- ^ Financial Wisdom Forum, Doing Well by Doing Good, post by Bylo Selhi on December 13, 2012.
- ^ Canadahelps, Benefits of Donating Securities, viewed April 18, 2021.
Further reading
- Financial Wisdom Forum topic: "Doing Well by Doing Good [Donate Securities to Charity"]