My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, November 5, 2018

Donating Marketable Securities – Altruism and Tax Savings Rolled into One!

As the year winds down, many people consider making charitable donations for income tax purposes or because the holiday season is approaching and they feel altruistic. Whatever the reason, I applaud them; although based on this Globe & Mail article, Canadians as whole are not donating as generously as our American friends.


With the strong markets of the last few years, many people have large unrealized capital gains in their portfolios and may be considering locking in some of those gains given the recent turbulent markets.

A great way to benefit both a charity and your own tax situation is to make a donation of qualifying marketable securities that have increased in value. By doing such, you enrich a charity, obtain a personal charitable donation credit and you do not have to pay any capital gains tax on the donation of the marketable security.

The above is best reflected by an example:

Assume that you purchased 100 shares of ABC Corp. for $10 and the stock price is now $20. The shares are qualifying public marketable securities.

Assume you wish to make a $2,000 donation this year to your favourite charity.

Assume you are a high-rate taxpayer.

Please note the initial posting contained a calculation error that has been corrected.

Donation with Personal Cash


If you make your donation with $2,000 of personal funds you have in your bank account, the charity will receive $2,000 and you will receive a charitable credit. That credit is worth approximately $1,000 on your 2018 tax return. Thus, you are out of pocket approximately $1,000.

Donation with Sale of Stock


If you sell your shares of ABC Corp. to fund the donation, the proceeds from the sale of stock will be $2,000. However, you must account for the taxman and you will owe approximately $250 in tax (again assuming you are a higher rate taxpayer) on the capital gain and thus, the maximum donation you can make is $1,750 (unless you top it up with $250 of personal cash) and the tax savings on your 2018 tax return in relation to the donation credit will be approximately $875. Thus, net-net, you are out of pocket $1,125 and only made a $1,750 donation as opposed to the $2,000 donation you wanted to contribute.

Donation of Stock


Alternatively, if you donate your shares of ABC Corp. directly to a charity (instead of first selling the shares), the charity receives a $2,000 donation (the charity can then sell or hold the shares), you receive a $2,000 charitable donation receipt and receive a tax credit worth approximately $1,000 on your 2018 tax return. Thus, as with the donation of personal cash, the charity received $2,000 and you are only out of pocket approximately $1,000.

However, you will not have to pay the $250 in capital gains tax that you would on a typical public market sale, since the Income Tax Act exempts the gain from capital gains tax when qualifying shares are donated directly to a charity. If you are feeling really altruistic, you can then donate the $250 tax savings from your personal cash.

Qualifying Securities


To make the donation the investment must be a publicly traded security. The most common publicly traded securities are shares, debt obligations, and mutual funds that are listed on designated stock exchanges.

Practicalities


You should first confirm with the charitable organization that they accept donations of marketable securities and try to give yourself some time for the transfer and paperwork to occur. You should try to do this by early December at the latest. Each organization has their own paperwork and rules, but in the end, many can arrange electronic transfers.

Corporations


Corporations can also donate shares and eliminate their capital gains tax. In addition, the gain can often be added to the tax-free capital dividend account (see this blog post on capital dividends).

Since corporations can be taxed in various manners depending upon the type of income and their corporate status, you need to run the numbers with your accountant to understand the specific benefit to your corporation, but in some cases the savings are even better than for an individual.

If you have marketable securities with unrealized capital gains and wish to make a donation, I would suggest donating the securities to a charitable organization is the most tax efficient way to make the donation while achieving your altruistic objectives.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

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