When publicly traded securities are donated to a charitable organization, they are exempt from capital gains tax. As such, donating securities is a way to achieve additional tax savings over and above the usual donation tax credit. If you own securities that have appreciated in value from their original cost, consider donating them to Tapestry to eliminate the capital gains tax that would be due on their sale, while also collecting the usual donation tax credit. Stocks and mutual funds are commonly donated, but other publicly traded securities can be donated as well. It is important to note that, while this strategy can be used with securities held in taxable accounts, it is not applicable to securities held in RRSPs, RRIFs or other tax deferred portfolios. Always consult your tax advisor.
UNDERSTANDING THE TAX BENEFITS OF DONATING SECURITIES
A number of years ago, the federal government granted an exemption from capital gains tax when publicly traded securities are donated to a charitable organization. Stocks and mutual funds are commonly donated, but other publicly traded securities can be donated as well. It is important to note that, while this strategy can be used with securities held in taxable accounts, it is not applicable to RRSPs, RRIFs or other tax deferred portfolios.
Consider the following example:
Ms. X owns shares of ABC Inc., a publicly-traded company listed on the TSX, with a current market value of $10,000. The stock is owned in a taxable portfolio and has been a “winner” because the original cost was only $4,000. Therefore, there is a $6,000 unrealized capital gain on the stock.
Suppose Ms. X has decided to make a $10,000 donation to Tapestry.
Case A: Cash donation
If a cash donation is made, Ms. X will get the usual donation tax credit in her income tax return, worth about $4,500 in tax savings.
However, she still owns the ABC Inc. shares. If they were to be sold tomorrow, next week or next month for $10,000, she would realize a $6,000 capital gain that would have to be reported in her income tax return.
Half of that gain would be included in her “taxable income” in the year in which the shares were sold.
If she is in the top tax bracket (approximately 46% in Ontario), the tax payable on the gain will be about $1,380 (i.e. half of the $6,000 gain times 46%).
However, there may be a better way!
Case B: Securities Donation
Because the Income Tax Act allows the same donation tax credit for a donation of securities as it does for cash donations, Ms. X could have instructed her portfolio manager to transfer her shares of ABC Inc. directly to Tapestry Opera.
In order to do this, she simply fills out a form available on Tapestry’s website and provides her portfolio manager Tapestry’s broker name and account number etc. as shown on the form.
As a result of the donation, Ms. X will receive the same donation tax credit for the $10,000 gift (i.e. about $4,500 in tax savings) as she would receive for a cash donation.
However, she will not be required to recognize any capital gain in her income tax return as a result of her ABC Inc. shares being transferred to Tapestry.
Therefore, she has saved about $1,380 more than if she had donated cash (Case A) and sold the securities outright.
Effects on Investment Portfolio
At this point, the comparison is “apples to oranges” because in Case A (the donation of cash), her portfolio still owns $10,000 worth of ABC Inc. shares, and her bank account is $10,000 lower.
However, in Case B (the donation of securities), the ABC Inc. shares are no longer in her investment portfolio, and her bank account balance has not been reduced.
In order to restore the investment portfolio to the pre-donation level, and to ensure that the portfolio will once again have the desired asset mix and stock composition, Ms. X could transfer $10,000 cash from her bank account to her investment portfolio at the same time that the securities are donated.
The portfolio manager would then buy $10,000 worth of ABC Inc. shares at the current market price. The cost base of Ms. X’s ABC Inc. shares will have been “stepped up” from their original cost of $4,000 to the current market value of $10,000 and in effect, the $6,000 capital gain will disappear “tax free.”
The Need to Obtain Professional Tax Advice
At any point in time, there may be certain securities in your investment portfolio that have substantially increased in value from their original cost, thereby presenting an opportunity to donate securities and save on capital gains tax.
However, the intent of this note is to alert you to a tax planning idea that might be useful in your situation. Every person’s tax situation is different and what will work in some situations will not work in others. Therefore, it is essential that you speak with your tax advisor who will be able to consider your particular facts and circumstances and determine whether or not this strategy is feasible for you.
To donate securities, download the form here.
For more information contact:
Keith Fernandes, Manager of Patron Engagement and Individual Giving at 416 537-6066 x 243 or email at firstname.lastname@example.org