Donating Stock to Charity Can Enhance Your Tax Benefit
When most donors think about giving to charity, their first thought is often a gift of cash. But donating stock instead may enhance a donor’s tax benefit.
If a donor has stocks that have appreciated significantly over time or a sudden surge in value of one of their holdings has created an imbalance in their portfolio, a donor may find themselves in an advantageous position to make a gift to their favourite charity.
This article explores the details and benefits of donating publicly traded securities, such as stock, to charity.
Gifting publicly traded securities
When a donor experiences one of the situations above or some other instance where their stocks are performing well and wish to use this opportunity to make a donation, they have a few options.
The donor could sell off their shares and use some or all of the proceeds for a donation. Although quite straightforward, this process will cause the donor to incur capital gains tax. This reduces the capital available to the donor and may result in a smaller gift.
However, by donating the shares to a qualified charity recognized by the Canadian Revenue Agency (CRA), the donor may be entitled to an inclusion rate of zero on any capital gains – which means they would not pay capital gains tax on the appreciated capital they donate.
The capital gains triggered when donating securities may be eliminated in some cases if the securities are donated in-kind. To qualify for the elimination of capital gains, the donated securities must be:
- Shares, debt obligations, or rights listed on a designated stock exchange
- Mutual funds
- Interest in related segregated funds
- Government of Canada or provincial government bonds
Before making a donation in-kind, it is important for donors to speak with their financial advisor as well as their preferred charity to ensure the charity can accept in-kind donations.
Donors can give more with their stocks
By donating stock that has appreciated for more than a year, donors can give more than if they sold the stock and then made a cash donation. The reason for this is simple: they would avoid capital gains taxes. Given that the Dow Jones Industrial Average rose from about 18,000 at the end of March 2015 to about 22,000 at the end of March 2020, it is quite likely many investors may realize a taxable return on the sale of assets purchased over the past five years. However, if donated directly to charity the appreciated stocks would incur no capital gains tax resulting in a potentially larger donation to the given charity. Plus, the donor is eligible to deduct the full fair-market value of the asset donated from their income taxes, up to a certain amount. As with any financial decisions, donors should consult their financial advisors to fully understand their options.
Simplify donations of stock with a Donor Advised Fund
An in-kind donation of stock to charity may be appealing to donors but may also cause concern for others that the option will require additional paperwork, phone calls, and administration time—not to mention the possibility that some charities may not be set up to accept gifts of stock.
A Donor Advised Fund, such as those offered by Gift Funds Canada can simplify donations of stock and enable the donor to focus on the impact of their gift rather than the administrative headaches of making the donation.
A donor advised fund not only simplifies the process of giving stocks to charity, but it provides the flexibility for the donor to then provide cash grants to multiple charities.
Here’s how it works: The donor makes an in-kind donation to their donor advised fund and receives an immediate donation receipt for the fair market value of the gift. The donor can then make recommendations as to when, where and how much of the grantable assets in their fund are disbursed. And at tax time, there is one form to file instead of many.
Donors who are philanthropically minded but unsure which charity they would like to give to, can donate stock to their donor-advised fund, receive an immediate charitable donation receipt for the current tax year, and then take their time considering a suitable charity to receive cash grants.
This kind of flexibility is particularly appealing for donors looking to rebalance their investment portfolio after a particularly good year of return by making a gift to charity. They are able to offset their taxes and take the time they need to make a meaningful contribution to the charity of their choice.
Potentially reduce future capital gains
It is not uncommon for investors to have stocks that they want to hold onto for the long term. Any appreciation of that stock’s value confirms their belief in it, but it can also set the stage for substantial gains when they decide to sell. Donating some of the appreciated shares and then buying new shares to reset the donor’s cost basis at the current, higher price can reduce future capital gains tax exposure if the stock continues to grow in value.
There are a few things to keep in mind when donating stock to charity. First, donating stocks directly to charity is a more efficient way to give compared to selling off stock and making a cash donation. Donors should remember that not all charities can accept gifts of stock, but establishing a Donor Advised Fund can enable this form of in-kind contribution, will result in an immediate donation receipt, and avoid paying capital gains in the same year. Not to mention, enable the donor in the end to make a larger donation to their preferred charity.
Finally, donors should consult their trusted financial advisor, aided by the experienced team at Gift Funds Canada, to make the greatest charitable impact with their high-performing stocks.