Written by Joel Bray, CFP CLU MFA-P
Vice President, Relationship Management, Cardinal Capital Management
With the end of 2022 only 6 weeks away, we approach a popular season where people often support charities close to them. While most donations occur in the form of cash, cheques or credit cards, there are more effective strategies to maximize your impact AND enhance your tax benefits. In this article, we will focus on donating securities (i.e. stocks, bonds, mutual funds or segregated funds) in-kind as a tax effective strategy beyond simply donating cash.
When you sell investments outside of a registered account (RRSP, RRIF, TFSA), it is deemed to be disposed of at its fair market value (FMV). If the security has appreciated in value, 50% of the capital gain, which is the difference between its current value and its adjusted cost base or (ACB), will be treated as additional taxable income. However, if you were to donate these securities in-kind, the taxable capital gain is avoided, and you also receive a donation tax credit for the full market value.
Example of donating securities to Alberta Cancer Foundation:
|Sell securities and donate cash||Donate securities in-kind|
|FMV of donation (i)||$100,000||$100,000|
|Adjust cost base||$20,000||$20,000|
|Taxable capital gain (50%)||$40,000||0|
|Tax on capital gain @ 48% MTR (ii)||$19,200||0|
|Tax savings from donation credit (iii)||$49,950||$49,950|
|Total cost of donation = i + ii – iii||$69,250||$50,050|
As a result of donating appreciated investments and eliminating the capital gains tax, this individual had tax savings of $19,200 ($69,250 – $50,050) rather than selling the investments and donating cash. The result is still $100,000 donation to Alberta Cancer Foundation.
Now that you’ve seen the benefits of an in-kind donation over simply donating cash. You may be asking yourself, “what securities should I actually donate?” While this answer can be different for everyone and dependent on several variables, you could consider the following common situations:
- Securities with the most growth – securities with the largest capital gain will result in your biggest tax savings because of the zero capital gains inclusion.
- Securities paying unneeded income – some securities have larger tax implications each year which can impact certain government income-tested benefits like Old Age Security (OAS). For example, if certain stocks are paying higher dividend income than you need, this could be an opportunity to donate and reduce your ongoing annual income.
- Depreciated Securities – in some situations, it may be a sound strategy to formally crystallize a loss on an investment that is down in value. In this case, simply selling the security and donating the cash proceeds is the easier route. You still receive the tax credit for the gifted amount and the capital loss can be carried back three years or indefinitely forward to offset other capital gains.
As you consider how you want to support charities before year-end, this is also a great opportunity to explore the best way to maximize your gift. Have a discussion with an advisor to explore your options.
A highly-respected financial advisor, Joel has become a leader in his field shortly after embarking on his career in 2006. He educates his clients to be both accountable and adaptable while partnering with them to build a financial future that they can enjoy.
Joel’s passion for charitable giving convinced him to pursue his Master Financial Advisor in Philanthropy (MFA-P) designation and become a member of the Canadian Association of Gift Planners. He encourages his clients to include supporting charities in their personal, corporate, and/or estate financial plans while building strong relationships with charities that are close to their hearts.