Gifts of Appreciated Securities
On May 2, 2006 the government eliminated capital gains tax on donations of publicly listed securities to charities, effective immediately.
In 1997 the federal government reduced capital gains tax on donations of stock by 50 per cent on a five-year trial basis. The result was a three-fold increase in gifts of publicly traded securities to charities - from $69.1 million to $200.3 million between 1997 and 2000. The percentage of stock donations jumped from 1.6% to 3.9% of all donations. In 2001, the government made the capital gains reduction permanent.
A recent TD Economics report shows Canadians hold $1.3 trillion in stocks - almost half of which are unrealized capital gains. The elimination of capital gains on donations of appreciated securities to charity could unleash a windfall of giving.
How it Works:
Usually, one-half of a capital gain is subject to tax; with gifts of publicly-listed securities, that amount is eliminated when the gift is made to a charitable organization or a public foundation, such as Thunder Bay & District Humane Society.
Listed Securities Include:
- shares, rights, and debt obligations listed on most Canadian and certain foreign stock exchanges
- prescribed debt obligations
- shares of the capital stock of a Canadian public mutual fund corporation
- units of widely held Canadian mutual fund trusts
- interests in related segregated fund trusts
Benefits of Giving Securities:
- Immediate donation receipt for fair market value of security, determined for most securities from their closing price on the date of the gift
- Favourable reductions in capital gains taxation
- Charity pays no tax on sale
- Gifts can be given during donor's lifetime or after, through their estate
- Securities may be transferred to a charity in either of the following ways:
- The donor delivers endorsed certificates to the charity. The gift is complete the day the certificate is delivered. A donation receipt is based on the value of the security that day.
- The donor transfers the securities from his/her brokerage account to the charity's account. The gift is complete when the securities are actually transferred to the charity's account.
Incentive to Give:
The income tax system supports the generosity of Canadians by providing a tax credit for donations to registered charities. This incentive is good public policy because each dollar of tax revenue that is lost through donations results in $2.25 that is put to work in the Thunder Bay & District Humane Society.
At the same time, the income tax system presents a barrier to giving. Many would-be donors have their assets invested in securities that have appreciated in value. Selling these securities to generate cash to make a donation will trigger capital gains taxes that partially offset the tax credit incentive.
The following illustrates the additional tax savings that donors realize when making gifts of appreciated publicly-listed securities rather than cash and the additional savings that are available now that the government has eliminated the taxation of gains in respect of such gifts.
Example - Donation of Capital Property versus Cash:
The following illustrates the additional tax savings that donors realize when making gifts of appreciated publicly traded securities rather than cash now that the government has eliminated the taxation of Capital gains in respect of such gifts.
1. Cash donation - All incomes
| Donation | $25,000 |
| Donation Tax Credit (46%) | $11,500 |
| Net Cost of Gift to Donor | $13,500 |
2. Gift The Shares to Public Charity
| Donor 1 | Donor 2 | Donor 3 | |
|---|---|---|---|
| Donor's Annual Income | $60,000 | $80,000 | $140,000 |
| Donation Amount | $25,000 | $25,000 | $25,000 |
| ACB of Stock or Mutual Fund | $12,500 | $12,500 | $12,500 |
| Marginal Tax Rate | 31% | 40% | 46% |
| Charitable Donation Tax Credit | $11,500 | $11,500 | $11,500 |
| Reduction in Capital Gains Tax (Additional Savings vs Cash Donation) |
$1,938 | $2,500 | $2,875 |
| Net Cost of Gift to Donor | $11,563 | $11,000 | $10,625 |