There are plenty of ways to help support a charity – the most popular being through cash donations. However, another great alternative to donating cash would be donating shares of a publicly traded security. Most people are often unaware of the fact that when you choose to donate publicly traded securities, there is significant tax relief in the form of a donation tax credit AND a capital gain that will not be subject to taxation in the donors hands.
When an individual decides to donate capital property (such as a house) to a registered charity, the tax treatment of that property being donated is considered to be disposed of for proceeds equal to its market value. This results in a taxable capital gain where the fair market value of the property at the time of the disposition exceeds its original purchase price. As a result, you will be subject to capital gains tax on the property and then you will receive a donation tax credit for the value of the donated property. Now, let us look at what happens when you donate publicly traded securities, such as stocks, bonds and mutual funds. For any such securities or shares that are donated, the taxable portion of the capital gain is reduced to zero therefore, eliminating any capital gains tax. This further enhances the tax relief from donating publicly traded securities to any registered charitable organizations.
It is also very important to note that when you are donating any publicly traded security; the security needs to be donated directly to the charity. This is because when you sell the security in the open market and then donate cash from the sale proceeds, any capital gain realized from the sale of that security will be subject to tax.By directly donating shares to a charitable organization, both the donor and the charity are to benefit. The charity receiving the shares as a donation will receive the full value of the share, as opposed to the net proceeds after tax. Whereas the donor will benefit by paying no tax on the inherent capital gain from the investment while still receiving a charitable donation receipt equal to the fair market value of the share at the time of the donation. Any donations made in excess of $200 can save you anywhere from 20.05% to 49.53% in taxes, depending on your level of income and your marginal tax rate.
Here is an example on the mechanics of the tax benefits of donating public company shares to a charity:
Let’s assume that the donor is taxed at a top marginal rate of 49.53%. Let’s assume that an individual wanted to donate share. They want to donate shares valued at $5,000 with an initial purchase price of $1,000. If the individual decides to first sell the shares and then later make a cash donation in the same year, a capital gain of $4,000 will be realized and subject to tax. The donor will be subject to tax in the amount of $990.60 ($4,000 x 50% x 49.53%) from the sale while being eligible to receive a $1,922.14 ($200 x 20% + $3,600 x 49.53%) tax credit. The net tax savings will be $931.54 ($1,922.14 less $990.60). Whereas if you donate the shares directly to the charity instead, the $990.60 tax from the capital gain will be eliminated, saving you a total of $1,922.14 in tax. That’s 90% more tax savings!!
To further maximize on receiving this favorable tax treatment, find any security in your portfolio that has appreciated in value. The greater the capital gain on the share the better candidate those shares are for donating to any registered Canadian charity of your choice.