Strategies for Giving

Gifts of Securities

Securities

Like most Canadians, you probably write cheques every year to your favorite charities. These gifts are not complicated and are most welcome by the charities. However, if you have marketable securities, and you are thinking about selling them and gifting the cash to the Foundation, there is a more cost effective way to make the gift.

Giving the securities intact is often a better alternative. If you have a portfolio of listed stocks or mutual funds that have increased significantly in value since you purchased them, it may be more advantageous for you to make your charitable gifts with these assets and keep your cash. Why? Because when you gift listed securities intact, and not sell them first, the capital gain is exempt from taxation as a result of the May 2, 2006 Federal budget announcement. Consequently, you will pay no tax on the gain when you donate, rather than sell, these securities.

Here's an example:

Thomas is considering a gift of 1,000 units of ABC securities valued at $25,000. The units cost him $15,000 some time ago, and he is wondering if he should sell them first or gift them outright to XYZ Charity.

1st scenario - If Thomas sold the units first, the taxable portion of his capital gain would be $5,000 ($25,000 - $15,000) x 50%). At his 40% tax rate, he would have to pay tax of $2,000 ($5,000 x 40%) leaving him $23,000 (25,000 - $2,000) to donate to XYZ. His tax receipt would be $23,000, which would generate $10,350 ($23,000 x 45%) in tax savings. Thomas’ net tax savings would be $8,350 ($10,350 - $2,000 in taxes paid).

2nd scenario - Now, with the capital gains tax exemption, if Thomas gifted the securities intact, his taxable capital gain would be reduced to $0. Thomas would receive a $25,000 tax receipt and would generate tax savings of $25,000 x 46% or $11,500.

Thomas receives an additional $3,150 ($11,500 - $8,350) in tax savings by simply gifting the securities intact.

Bequest of Securities

The elimination of the tax on capital gains applies to charitable bequests as well as to lifetime gifts. Thus, if you intend to make bequests to charity as well as to family members, it could be advantageous to fund your charitable bequest with appreciated, listed securities and your family bequests with other assets. You can do this either by making a specific bequest of certain securities, or by empowering your executor to select the assets for the charitable bequest.

Suppose, for example, that your estate consists of your principal residence, some cash, and $100,000 of listed securities with an adjusted cost base of $40,000. You want to leave $100,000 to charity and the balance to your children. If the securities go to the children, $30,000 of the gain (50% x $60,000) will be taxed as income. However, if the securities go to charity, you will not be taxed on any of the gain on your securities. Therefore, it is better to give the charity your securities and the children your cash and principal residence, neither of which is taxable.