Giving securities for tax savings

The appeal of donating securities, from a tax point of view, is the chance to effectively double up on tax benefits: there’s the donation tax credit associated with the gift, plus the elimination of a tax liability on any capital gain on the increase in value of the securities donated, which can represent a large potential tax savings.

“The vast majority of securities that are donated have fairly significant gains,” Burrows says.

When a client donates public securities in kind to a qualified charity, there is a deemed disposition at fair market value (FMV), and a capital gain (or loss) on the difference between the FMV and the adjusted cost base (ACB), just as there would be if the shares were sold. However, in the case of a donation of public securities, the tax rate on the capital gain is zero, as a result of an incentive in the Income Tax Act to encourage donations of public securities.

The donation of the security also results in a donation tax credit, in the same manner as it would for a donation of cash. The tax credit is valued 15% federally on the first $200 of all donations claimed in a tax year, and at the highest federal tax rate on amounts above that threshold.

“You often hear about people who combine donation receipts between spouses, so that they don’t have to hit that donation threshold of $200 more than once,” says John Waters, vice president and head of tax and estate planning with BMO Nesbitt Burns Inc. in Toronto.

It’s possible to claim a donation tax credit for as much as 75% of net income in a year, and unused credits can be carried forward up to five years.

Philanthropic experts suggest that it can make sense to donate an appreciated security in kind, when a client is considering making a gift of an amount, even in cases where the client would like to keep the security.

“Just take the cash you were planning to give and re-buy the security,” Burrows says. In this way, the client makes the donation, eliminates the tax on the capital gain and effectively raises the ACB of the securities.

Alternatively, it is possible to donate a portion of a holding in a particular security and to sell the remaining portion so that the donation tax credit arising from the gifted portion effectively covers the tax liability of the securities that were sold in the market. In this manner, the client can make a donation, keep the proceeds from the sold portion, and eliminate the tax on the capital gain.

“You’re paying zero tax, but you’re not giving [all the proceeds] away,” says Tim Cestnick, president and CEO of Toronto-based WaterStreet Group Inc.

In some cases, clients who are holding large amounts in a RRIF may decide to use a large donation of securities as a way to generate a donation tax credit large enough to offset the tax that would otherwise be liable on a significant withdrawal from their plan.

“Clients say, ‘I’m going to use charitable giving as a way to restructure my affairs,’ ” Burrows says. “I’ve had clients who’ve made large donations and shut down their RRIFs. They’re in a good position financially, and they love the idea of using donation tax credits to deal with the [tax liability] of RRIF withdrawals.”

Of course, it’s important that these strategies are motivated by charitable intent. Although there are tax-savings opportunities in making donations, and particularly donations of securities, the client will always end up with a lighter wallet after making a gift than before.

“At the end of the day, you’re giving money away,” Waters says. “It’s not about saving tax – that’s just a nice by-product of this. At the end of the day, you need the charitable intent.”

This is the first article in a three-part series on charitable giving.

Up next: Planning considerations for estate donations.