Making a contribution to a charity by way of gifting securities which have appreciated in value is a simple, easy and highly tax-efficient strategy. We recommend making use of this strategy to all our clients who have non-registered assets and who wish to make significant gifts to a registered charity. However, not everyone knows this strategy exists, why it’s so effective, how it can allow a person to give to charity at much lower cost than gifting cash – and how it can allow the charity to receive even more money at the end of the day.
The strategy itself is straightforward. When making a donation to a registered charity, the donor receives a charitable tax receipt in the value of the donation. This is, of course, true whether donating cash or securities. The sum total of donations are included on a taxpayer’s tax filing, and result in a tax credit used to reduce their taxes payable. The value of the tax credit depends on the donor’s province of residence; in Ontario it is about 40% of the value of the gift. This means that including taxes, the cost of a cash donation to a charity is only around 60% of the value of the donation.
The second benefit of donating appreciated securities is that on donation, the unrealized capital gain accrued to those securities is completely eliminated with no tax consequence to the donor nor the charity. This can be tremendously valuable. For example, take a $100,000 donation made with stocks purchased for $20,000. These shares have an unrealized capital gain of $80,000, which would result in an eventual tax bill of over $21,000 for an Ontario taxpayer in the highest tax bracket whenever the shares are sold. By donating the shares instead, this $21,000 tax liability disappears. Securities with larger unrealized gains would result in even more tax savings.
Putting the two benefits together, a $100,000 donation from the same donor has a true after-tax cost of about $39,000 – well under half the face value of the donation. This means not only that donations can be made at lower cost to the donor, but to the particularly philanthropic among us, it also means that more money can be given to the charity overall; by reducing the donor’s tax liability, they are left with more assets able to be donated.
Charitable giving through securities is a generous act which can be done very tax efficiently. By donating appreciated securities, the after-tax cost to the donor can be significantly reduced. We are proud to help coordinate dozens of charitable donations on behalf of our clients every year and are happy to assist with the transactions.