Generosity in Tax Season? (Part Two)

Selling publicly traded securities

Link to Part One

Like most Canadian taxpayers, Joanne and John Nelson* knew that charitable receipts generated tax credits that helped offset their income tax payable. That wasn’t why they donated to their favourite charities, but they appreciated the benefit, as it often allowed them to be a little more generous with their donations. The Nelsons sent cheques to various charities throughout the year and received their charitable receipts, which they filed away until tax time.

As their charitable giving expanded over the years, it became more and more difficult to keep track of everything. Now in their mid-fifties, the Nelsons were frustrated with searching for all the receipts and forms they needed to prepare their taxes and wondering if they’d been as effective in their giving as they could be. Looking ahead to the approaching tax season,they began asking themselves some serious questions.

Had they actually given as much to charity as they planned?  Were they donating the right assets at the right time? Why did they always end up surprised by the receipts collected at the end of year? The Nelsons needed a Generosity Plan™.

Strategic Giving Uncovered Significant Tax Savings

Joanne and John contacted Abundance Canada to help manage their annual donations and to ensure that they were giving in the most tax-efficient manner. When I met with them just before tax season, we reviewed their financial assets and discovered an opportunity to be more strategic in their giving.

Joanne and John had accumulated a considerable portfolio of publicly traded securities (stocks, bonds and mutual funds). These investments had done very well, resulting in high capital gains. By donating these publicly traded securities instead of selling the investments and donating cash, they could benefit from significant additional tax advantages.

Generosity by The Numbers

John and Joanne decided to donate some of their securities in-kind to Abundance Canada. Abundance Canada then sold the publicly traded securities at the fair market value (FMV), and the proceeds from the sale provided the funds to implement the Nelsons’ Generosity Plan. Not only did they receive a charitable receipt for the FMV of the donated securities, but the capital gains were tax exempt.

Let me explain in more detail. Joanne and John donated 400 shares of company XYZ with a cost base of $6,000. The FMV of the shares were $15,200, which meant Joanne and John had an unrealized capital gain of $9,200. If they sold the shares and donated the proceeds from the sale, they would have paid tax on 50% of the capital gain. However, by donating the shares in kind, the capital gain was not included in their taxable income. They received a charitable receipt for $15,200, and the $4,600 of taxable capital gain ($9,200 * 50%) was not included as taxable income when they filed their income tax returns.

Donate In-Kind Publicly Traded Securities Directly to Charity Sell Publicly Traded Securities and Donate Cash to Charity
Fair Market Value of a Donation (a) $15,200 $15,200
Cost Base $6,000 $6,000
Capital Gains $9,200 $9,200
Taxable Capital Gains $0 $4,600
Tax on Capital Gains @ 50% (b) $0 $2,300
Value of Tax Credit @ 50% (c) $7,600 $7,600
Total Cost of Donation: (a+b-c) $7,600 $9,900

*Using tax bracket at 50%

The Nelsons were so excited about the tax savings that they decided to increase their charitable donations for the next year, which allowed them to update their Generosity Plan and give even more generously. Joanne and John love how easy it’s become to provide ongoing support to their favourite charities, and when tax season comes around, they never have to hunt for all those charitable receipts.

*Pseudonyms used to protect the privacy of the individuals sharing their story

Contributed by Susan Yakabowich
Gift Planning Consultant

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