Unlocking Tax Benefits: A Guide to Donating Securities for Charitable Giving

 

Are you looking to make a charitable donation and wondering if there’s a smarter way to do it? Donating securities, such as stocks, bonds or mutual funds, might offer you significant tax advantages over donating cash. Not only can you support your favorite causes, but you might also reduce your tax bill more effectively. In this article, we’ll explore how donating securities works, the benefits it can provide, and what you need to consider to make the most of this strategy, based on Canadian tax rules.

 

What Types of Securities Qualify?

 

To take advantage of the tax benefits, the securities you donate must be specific types, including:

• Shares, debt obligations, or rights listed on a designated stock exchange
• Mutual funds
• Interests in related segregated fund trusts
• Government of Canada or provincial government bonds

Your donation must be made to a qualified donee, typically a registered charity. Before proceeding, confirm that the charity can accept in-kind donations, as not all organizations are equipped to handle securities.

 

Understanding the Donation Tax Credit

 

When you donate to a registered charity, you receive a tax credit that reduces your federal and provincial taxes. The credit depends on the donation amount and your income level. Federally, the first $200 of donations earns a 15% credit, while amounts above that can qualify for up to 33% if you’re in the highest tax bracket. Provincial credits vary by province. Note that this credit is non-refundable—it can’t reduce your taxes below zero—but it can significantly lower your tax liability.

 

Timing and Carry-Forward of Donations

 

You don’t have to claim the donation tax credit in the year you donate. You can carry it forward for up to five years, giving you flexibility to claim it when it’s most beneficial, such as in a high-income year to maximize the credit at a higher rate.

 

Limits on Donation Amounts

 

There’s no cap on how much you can donate, but for tax purposes, you can generally claim up to 75% of your net income in a given year. In Quebec, this limit is 100%, and it’s also 100% in the year of death and the preceding year. Any excess can be carried forward within the five-year window.

 

Eliminating Capital Gains Tax

 

A standout benefit of donating securities is the potential to eliminate capital gains tax. Normally, selling appreciated securities triggers a tax on half the gain. But when you donate them directly, that gain is exempt from tax, and you still receive a donation tax credit based on the securities’ fair market value.

 

For example, imagine you own shares worth $50,000 that you bought for $10,000. Selling them and donating the cash would incur tax on the $40,000 gain—say, $9,200 at a 46% combined tax rate. After a $23,000 tax credit, your net cost would be $36,200. Donating the shares directly avoids the $9,200 tax, leaving your net cost at $27,000—saving that $9,200 in capital gains taxes versus donating cash.

 

Offsetting Taxes on Selling Other Securities

 

Planning to sell securities and realize a capital gain? You can donate other securities to generate a tax credit that offsets the tax liability from the sale. This strategy can help you rebalance your portfolio while supporting a charity.

 

Valuation of Donated Securities

 

The charity issues a donation receipt based on the fair market value of the securities on the date of receipt. For publicly traded shares, this is typically the closing price that day, ensuring a straightforward valuation process.

 

Considerations for Alternative Minimum Tax (AMT)

 

The alternative minimum tax (AMT) might impact your donation’s tax benefits. AMT ensures a minimum tax payment by limiting certain tax preferences, including donation credits. Check with a tax advisor or reach out to me to learn how AMT might affect your situation.

 

Donating Securities at Death

 

Upon passing, your estate can also donate securities and eliminate capital gains tax if the donation occurs within 60 months of death and meets specific conditions, such as being a graduated rate estate. This can be a tax-efficient way to support charities while reducing estate taxes.

 

Other Types of Securities

 

Special rules apply to niche assets like flow-through investments, employee stock option shares, and exchangeable shares. These can offer additional tax advantages in specific scenarios, so they’re worth exploring if relevant to your portfolio.

 

Comparison with Donating Registered Assets

 

If you have registered accounts (like RRSPs) and non-registered securities, donating non-registered securities with accrued gains is typically more tax-efficient. Registered assets don’t qualify for the capital gains exemption, making them less advantageous for in-kind donations.

 

Conclusion

 

Donating securities can be a powerful tool in your charitable giving strategy, offering tax benefits that enhance your ability to support causes you care about. Whether you’re avoiding capital gains tax or leveraging credits strategically, this approach can make your generosity go further. Given the complexities of Canadian tax laws, consider discussing this option with a qualified tax advisor to ensure it fits your financial picture.

 

By understanding these benefits, you can make more informed decisions about your philanthropy. It’s a win-win: you support worthy causes while optimizing your tax strategy.