The tax benefits of donating stocks to charities

There were many intriguing issues a couple months ago when the Reddit subgroup WallStreetBets drove the shares of GameStop, BlackBerry, AMC Entertainment, and others skyrocketing. The issues ranged from retail vs institutional investors to the power of social media stock groups to the way the Reddit group used excessive shorting to manipulate the stock price against the shorters themselves.

I will not comment on these issues today. What I want to discuss is the altruism shown by members of the WallStreetBets group. When I logged on to the forum to see what all the fuss was about, I noticed a lot of digital trash. But what I found remarkably interesting was the numbers of posters saying they would contribute x amount of their proceeds to charity and urging others to do the same. What a congruence of capitalism and altruism.

This blog post deals with the tax benefits of charitable giving and, more particularly, donating public stocks with unrealized capital gains to your charity of choice.

The Reddit folks were not the only winners this year. Those lucky enough to have kept their jobs during COVID in many cases built up excess cash reserves as their spending plunged on entertainment, travel and some retail. Many of those people and other Canadians shut in by COVID turned to stock market trading to entertain themselves and make money (as seemingly any number of stocks and sectors produced outsized gains during various periods throughout the fall and into 2021).

So, if you have significant realized or unrealized gains in 2021, how can you help society and improve your tax situation? The answer: donating part of your winnings or shares in public securities with large gains.

I have discussed this topic before, but given the current circumstances, I think it is a good time for a refresher on the tax benefits of making donations, especially as many charitable organizations are hurting due to COVID. Please note I will only discuss the donations of cash and public securities today.

Donation of cash

If you have realized capital gains on stocks in 2021, you can make a cash donation (the same holds for any cash donation whether from a realized stock gain or just excess cash in your bank account). You can claim a donation credit of up to 75% of your net income. Where an individual makes a charitable donation of cash, there is a federal non-refundable tax credit of 15% on the first $200 of donations. For donations in excess of $200, the non-refundable tax credit increases to 29%. In addition, the provinces provide provincial tax credits.

In Ontario, my home province, the actual tax savings for a donation range from approximately 40% (if your net income is around $50,000) to 50% (if you are a high-rate taxpayer) of your actual donation, for any donations in excess of the $200 limit. Thus, from a cash perspective, your donation only costs you 50-60% of what you donate to the charity. A good deal for all parties.

Donation of public securities

For those of you sitting with large unrealized gains on public securities, a donation of these shares is even more tax effective than a donation of cash from the sale of your shares (this applies to non-registered account donations only, not RRSPs etc.). That is because when you donate public securities listed on a prescribed stock exchange, the taxable portion of the capital gain is eliminated, and the net after-tax cost of the donation is reduced substantially.

For example, if a high-rate Ontario taxpayer sells a stock for a $10,000 gain (say the proceeds were $12,000 and the cost was $2,000), they would owe approximately $2,700 in income tax on the capital gain in the following April. If they donate the gross proceeds of $12,000, the donation would result in income tax savings of approximately $6,000 when they filed their return. The net after-tax cost of the donation is approximately $8,700 ($12,000 + $2,700 tax - $6,000 tax credit).

However, if the taxpayer donated the stock directly to a charity, the organization would receive $12,000, the taxpayer would receive a refund of approximately $6,000, and they would owe no taxes on the capital gain, making the net after-tax donation cost only $6,000.

Clearly, where you have a stock or bond you intend to sell and you plan on donating some or all of the proceeds, a direct contribution of the security to a charity is far more tax efficient. Also note that most charities make the process relatively pain-free.

Donation of securities from a private corporation

Canadian-controlled private corporations (CCPCs) can be taxed in various ways, so I am not going to get into the ins and outs of donating. Speak to your accountant, but it generally won’t matter that much after tax whether you do a personal or corporate donation. When it does matter, the choice of personal vs. corporation depends on your situation.

However, for most CCPCs, they will be able to add 100% of the capital gain ($10,000 in the example above) to their capital dividend account (CDA) and get this money out tax-free (assuming there are no negative attributes to the CDA account). For a detailed discussion of the CDA, see this blog post.

COVID has been far from equal in how it’s impacted different industries and the people working in them. If are one of the lucky ones whose job has not been affected—perhaps it even thrived—and you played the market and had capital gains, you may wish to donate some of your gains to help a good cause. You will help make the world a better place. And as an added bonus, you will reduce your taxes.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

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