Making an in-kind donation of stocks is more efficient than gifting cash, but it’s a tool that’s often underutilized. Learning how to make the most out of this simple and efficient option can help you donate more, and save on taxes if you’ve had capital gains.
One of the most efficient ways to give to charity is by making an in-kind donation of stocks, but while this is a simple and tax-efficient way to contribute to a cause, it’s often underutilized.
Paul Nazareth, vice-president of community engagement with CanadaHelps, says there’s a massive lack of education around donating financial assets, even among high net worth individuals with teams of advisors, because too few are trained in philanthropy.
And as Canada’s demographic shifts to one that is older and more asset-based, both charities and individuals will have to rethink how donations are made.
“It’s cracking open the guts of fundraising to get to the more direct gifts, the intentional gifts, the bigger gifts,” Nazareth said.
“There’s a lot of wonderful, well-meaning, generous people out there, who are saying, ‘I would do this, just show me how.’ They need two people to make that happen – the charity to tell them why, and the professional advisor to show them how.”
The main benefit of donating securities instead of cash is that by donating these assets in-kind, the donor gets both a donation tax credit and a capital gains exemption (if the securities themselves made gains).
That means you can donate more to the charity – and get a better tax break.
For instance, let’s say you at one point bought $20,000 in stock, and it has now gone up to $100,000, resulting in an $80,000 capital gain. If you were being taxed at the top rate of 50 per cent, this would lead to a $40,000 inclusion, so you’d pay tax on that $40,000.
At the top marginal rate you’d pay $20,000 in taxes, which would leave you only $80,000 out of the $100,00 to donate, according to Lynne Zulian, CPA and tax partner with Grant Thornton in Barrie, Ont.
If you donated the security before liquidating it, however, there would be no capital gain calculated and you would get a donation credit for the full $100,000, its fair market value.
“From a tax perspective, a good time to do a donation is if you’ve had a year of unusually high income,” she said.
“Maybe you’re getting up in years and you’ve sold your cottage and you can’t shield it with the principal residence exemption so you’ve got a big tax hit coming – in the same year you may want to make a large donation of some sort to mitigate your tax.”
For the charity, it’s helpful to show donors how much there is to gain from this kind of arrangement.
“As far as a benefit to the charity, it’s a bit of a marketing tool that they can use to make the donors aware that these rules exist,” Zulian said.
To donate stocks in-kind, you would have to contact your financial advisor and let them know what shares you wanted to donate and to which charity. They would have you sign a letter of direction, and they would then contact the charity to make arrangements to transfer those securities.
The assets would go from your securities account to the charity, which would accept and liquidate them, issuing the taxpayer a donation receipt for the fair market value of the securities at the moment they are sold.
The process is straightforward, although as with any donation, you’d want to make sure you’re giving to a registered charity and one that supports a cause you believe in.
According to Paul Shelestowsky, a senior wealth advisor with Meridian based out of Niagara-on-the-Lake, Ont., it’s also important to make sure your donation isn’t going to offset your income to the point where you may incur an alternate minimum tax.
“You could end up with such a large tax credit that it offsets your income to the point that the government doesn’t use the whole credit,” he said.
“We see that where somebody makes a large one-time donation. You could end up with a $100,000 tax credit, but if you only make $80,000 a year you could be in trouble, so you need to spread that credit over, say, $20,000 a year.”
To make sure you don’t trigger an unintended consequence, Shelestowsky said, claims shouldn’t exceed 75 per cent of your net income. They can also be carried forward for five years.
Your accountant and financial planner can help you figure out how to make the right tax decisions when making donations, as well as what assets are best to donate.
But if you’re looking for specific guidance on charitable giving, you may want to seek out a philanthropic advisor through your bank, wealth advisory firm or associations like the Canadian Association of Gift Planners.
Peers are also a good resource, said Nazareth, noting that many donors want to protect their privacy – and even high net worth advisors aren’t always as well versed in philanthropy as one might expect.
“A lot of people, when they crunch the numbers with their advisor, they’re shocked to see that they can give more,” Nazareth said.
“If they’re getting more back, they’ll say, well, `I was planning to give $5,000 anyway, if I’m going to get more back maybe I’ll give six.
That makes them feel good, and that makes the charity feel good.”
For more information:
See the Canada Revenue Agency’s list of all registered charities.
Information for advisors:
CAGP's Guide For Professional Financial Advisors