The Best of The Blunt Bean Counter - The Tax Benefits of Donating Stocks to Charities

This summer I am re-posting the "best of" The Blunt Bean Counter blog while I work on my golf game (for some reason there seems to be a negative relationship between my age and my handicap). Today, I am re-posting a May 2021 blog titled "The Tax Benefits of Donating Stocks to Charities". 

 

I have edited this preamble, as the original blog post had a few paragraphs discussing the unusual congruence of capitalism and altruism in relation to the Reddit WallStreetBets group. As you may recall, capitalism (at it's worst or best depending upon your view) was on display as many members of the WallStreetBets forum made astronomical amounts of money on the shares of GameStop, AMC etc. when they "squeezed short sellers". Yet, altruism was also on display, as there were many stories of the Reddit users making large donations with their profits and urging others to do likewise. 

 

Speaking of charity and kindness, the Canadian Income Tax Act is surprisingly altruistic. It provides for charitable giving while at the same time providing income tax benefits. This is especially true where you donate publicly listed securities with unrealized capital gains to your charity of choice. Today, I will discuss the benefits of a donation of publicly listed securities to a charity versus a cash only donation.

Donation of Cash

If you donate cash to charity, 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 actually donate to the charity. A good deal for all parties.

Donation of Public Securities

For those of you sitting with large unrealized capital gains on public securities, a donation of these shares is more tax effective than a donation of cash from the after-tax sale of your shares (this applies to non-registered account donations only, not RRSPs etc.). This 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 cash cost of the donation is approximately $8,700 ($12,000 cash donation + $2,700 tax owing - $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 cash 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. Most charities make the process relatively pain-free (note: as a reader commented in my original post, you can also make donations to public foundations).

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. However, one thing to consider when deciding whether to donate personally or corporately is that 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 to you and/or the other shareholders tax-free (assuming there are no negative attributes to the CDA account). For a detailed discussion of the CDA, see this blog post.  In all cases, please speak to your accountant so they can help you determine whether to make a personal or corporate donation.

While the markets have not been very good in 2022, you may still have several marketable securities with large unrealized gains due to the strong markets of the last few years. Consider donating some of these shares to help a good cause. You will help make the world a better place and as an added bonus, you will reduce your taxes.

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.

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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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.