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Give More with Gifts of Securities

Donating securities

Did you know cash donations aren’t the only way you can support your favourite charity? There might be a more tax effective way to give.

Individual and corporations that donate publicly traded securities in-kind avoid paying the capital gains tax. Publicly traded securities are stocks, bonds, mutual funds and ETFs (Exchange Traded Funds) listed on a designated stock exchange. It is common to think about capital gains with stocks, mutual funds and ETFs, however, with declining interest rates, you might have significant unrealized capital gains on bonds you hold in your investment portfolio. Donating bonds in-kind results in the same tax efficiency as donating stocks, mutual funds or ETFs.

Example: Gifting Stocks to Charity

Fred had always donated a percentage of his annual income through direct cash gifts to various charities. When a local homeless shelter launched a fundraising campaign to help construct a new building, he wanted to give them an extra $10,000 above his annual support. Over lunch one day a friend mentioned the benefits of donating publicly traded securities and recommended Abundance Canada to help manage this type of donation, so Fred gave us a call.

Among other assets, Fred had an investment account that included a stock worth $10,000 with an adjusted cost base of $4,000. If he sold the stock and donated the cash proceeds, he would pay tax on 50% of the $6,000 capital gain, effectively increasing his taxable income by $3,000. At a 46% tax rate this meant an additional tax bill of $1,380 on the taxable capital gain and a tax credit of $4,600 from his $10,000 donation. His $10,000 gift to charity would cost him $6,780 ($10,000 + $1,380 – $4,600).

However, if Fred chose to donate the stock in-kind he would avoid the capital gains tax. His taxable income would be $3,000 less than if he sold his stock to make the donation. His gift to charity would cost him $5,400 ($10,000 – $4,600).

By making an inind gift of securities instead of selling the securities and donating cash, Fred was able to provide the additional support to the homeless shelter and reduce his taxable income by $3,000.

But gifts of securities aren’t just for people who own stocks or mutual funds. If you hold bonds in your investment account, you can donate them in-kind and receive the same tax benefits.

Did you know cash donations aren’t the only way you can support your favourite charity? Here's a more tax effective way to give:Click to Tweet

Example: Gifting Bonds to Charity

Marge volunteered at a local charity and made cash donations when she was able. She felt especially connected to their most recent outreach project and wanted to support the initiative by giving a larger gift than usual. Marge is retired and her modest income from Canada Pension Plan payments, Old Age Security, and an investment portfolio consisting of bonds earning T5 taxable income, did not provide sufficient cash for this additional donation.

Marge got in touch with Abundance Canada to discuss her situation. It turned out that interest rates had gone down since she purchased the bonds, meaning she had a large amount of unrealized capital gains. By donating some of her bonds in-kind, Marge was able to support her favourite charity with a generous donation and reduce her taxable income.

Marge received a charitable receipt for her donation and avoided paying tax on the capital gain from the donated bonds. Because of the tax efficiency of the in-kind donation, Marge decided to donate additional bonds to Abundance Canada. Abundance Canada sold the bonds and the cash was added to a Gifting Fund™ that she can use to support her favourite charities going forward. This gift planning strategy allowed Marge to reduce her T5 taxable income, avoid any capital gains tax and establish a Generosity Plan™ to provide ongoing support to the charities that mean so much to her.

 

Harold Penner

 

 

Contributed by Harold Penner
Gift Planning Consultant

 

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