For Canadians looking to make a meaningful charitable impact, the decision of how to donate can be just as important as what to donate. While cash donations are always welcomed by charities, donating publicly traded securities offers a powerful and often more tax-efficient alternative. By strategically gifting publicly- traded stocks, bonds, or mutual fund units directly to a registered charity, donors can unlock significant tax advantages while simultaneously supporting causes they deeply care about.
Q: Why is it beneficial to donate securities instead of cash?
A: When you donate cash, the charity receives the full amount, and you receive a tax receipt for that amount. However, if you sell appreciated securities (those that have increased in value since you purchased them) and then donate the cash proceeds, you will be subject to capital gains tax on the profit. Currently, 50% of the capital gain is taxable at your marginal tax rate.
By donating qualifying securities directly to a registered charity, you can eliminate the capital gains tax that would otherwise be payable.
Example:
Imagine you purchased shares of a publicly traded company for $5,000 and they are now worth $10,000. If you sell these shares and donate the $10,000 proceeds, you will be taxed on the $5,000 capital gain. At a 50% inclusion rate and a 40% marginal tax rate, this would result in $1,000 in taxes ($5,000 x 50% x 40%), although you will benefit from a charitable donation credit for the $10,000 donated. However, if you donate the shares directly to a registered charity, that $1,000 in tax is avoided, and you will still receive a charitable donation credit for the full $10,000.
Q: Are there any specific requirements for the charity I donate to?
A: Yes, to be eligible for the tax benefits, the organization you are donating to must be a registered charity with the Canada Revenue Agency (CRA), or another qualified donee. You can usually verify a charity's registration status on the CRA website.
Q: Is donating securities complicated?
A: While the process might involve a few extra steps compared to a cash donation (such as transferring the securities to the charity's brokerage account), most charities have established procedures to facilitate these types of gifts. Your financial institution can also assist with the transfer.
Q: Should I speak to a professional before donating securities?
A: Absolutely. It is highly recommended to consult with your financial advisor and/or tax professional to determine the best donation strategy for your individual circumstances. They can help you understand the specific tax benefits and implications based on your financial situation and the types of securities you hold.
