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.
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Thanks for your blogs Mark! One issue that arises when donors are wanting to donate securities in kind, is that many charities will not be set up to accept securities. IE they are smaller charities, less technical, and don’t have the expertise nor brokerage accounts to accept stocks directly. so in cases like this, the donor wants to use the gifting of securities as it is most tax efficient for them, but the charities does not accept securities. There is a unique solution to this situation as the securities can be donated to a public foundation (I work for Abundance Canada, we do lots of this type of work, but there are many others too) with the resulting distribution to the charity (or charities) of the donor’s choice. Effectively, the public foundation becomes the clearing house for this type of donation of securities. It works well - and to be clear in this instance - the donation then is to the public foundation who has the capacity to accept securities, so that is where the receipt also comes from. And then the distribution is a “charity to charity” transfer.ReplyDelete
In these cases, we do retain 2% or less for our work in the background but this becomes a very practical option for many people. Furthermore, many charities do not want to maintain a brokerage account (even if they could) so they happily collaborate with a public foundation in this regard. Note that approx. half of the 86 000 charities in Canada operate with no paid staff, they rely exclusively on volunteers, so in many cases they just do not have this expertise on staff.
Thx Marlow and for your comments off blogDelete