It can pay to be charitable
New tax rules eliminate capital gains for donated securities
By Greg Holohan, Investment Executive, ScotiaMcLeod
July 2006
When the federal government announced its new budget earlier this year, it created a handsome benefit for Canadians who give to charities.
Although it has always been advantageous to donate securities to charity, typically only the wealthiest or savviest Canadians have been in a position to take advantage of the tax savings opportunities. However, the recent budget completely eliminated capital gains on gifts of publicly-traded securities to public charities, making tax savings more accessible to average Canadian families.
What it means for your family
If you hold stocks or mutual funds in a non-registered investment account you will want to consider donating the securities instead of cash to your church or favourite charity. Simply by restructuring the way that you give, you could generate hundreds or even thousands of dollars in tax saved.
Let’s take the very plausible example of Mr. Smith, who holds:
$10,000 in cash in a savings account
Securities worth $10,000 in a non-registered investment account; the securities have a cost base (or average purchase price) of $4,000
Scenario A: Donating Cash
If Mr. Smith were to make a cash donation to his church, he would receive a receipt for $10,000. The receipt would produce a tax credit of 46% or $4,600 (assuming a 46% marginal tax rate).
However, if Mr. Smith were to sell his securities, he would also face a capital gain of $6,000. Under current capital gains tax rules, 50% of this gain is taxed at his marginal tax rate, which means that he would owe tax of $1,380.
Many families operate in this manner, making their donations in cash and inadvertently producing sizable tax bills in the future when they sell their investments. Instead, donors should consider:
Scenario B: Donating Securities
If Mr. Smith were to instead donate the securities valued at $10,000 to his church, he would still receive a receipt for $10,000 (and the resultant tax credit of $4,600).
However, under the new legislation, he also avoids paying the taxable capital gain, which leaves an additional $1,380 at his disposal. In effect, the total tax savings for Mr. Smith would be almost 60% of the value of the gift!
As an added benefit, since Mr. Smith also holds $10,000 in cash, he has the option to buy-back the same securities at the current market price and reset his cost base. Any capital gains in the future would be based on a $10,000 cost base.
The benefit for churches / charities
While impractical for regular tithing, donating securities is a compelling way to make lump-sum donations. Theoretically, it could also prompt higher gift amounts, if donors who are so inclined enhance the value of their gift by the value of the foregone capital gains tax. In other words, charities could get more, for less.
There is also an opportunity to encourage giving from “blue-collar” retirees. During their working years, many accumulated shares in their former employer (e.g. Bell Canada). Unwilling to liquidate the shares and face the resultant capital gains tax, it is common to see these folks perpetually hold their stock positions, even until their death. Making donors aware of the new opportunity avoid the capital gains tax and get a tax deduction may make larger, lump-sum donations from average Canadians more palatable and more common.
Important considerations
Prior to making a donation, your charitable organization needs to be equipped to receive donated securities. (Virtually all major charitable organizations will already accept donated securities, although you may find that smaller churches do not have an account at an investment brokerage firm.)
The donation must be an “in kind” transfer of the security itself, not the cash proceeds of a sale of the security. The transfer is best made electronically from your investment account to the charity’s custody or brokerage account.
In order to receive the noted tax benefits, the donated securities have to come out of a non-registered investment account (i.e. not an RRSP or RRIF). Eligible publicly-traded securities are stocks, mutual fund units, income trust units, warrants, or exchange-traded funds, listed on Canadian and major international exchanges.
Although donating securities can be a very attractive way to contribute to charity, there are a number of other donation strategies. (For example, Charitable Remainder Trusts allow you to give property but maintain the use of it during your lifetime.) To understand the optimal way to make your next donation, take special care to speak to your financial advisor or accountant, who can look more closely at your specific situation.
Greg Holohan is an Investment Executive with ScotiaMcLeod. Through his unique approach to financial stewardship, he specializes in helping families maximize and protect their wealth. He can be reached at 1.800.447.5854 or greg_holohan@scotiamcleod.com |
