Gifts of Securities

If you want to attract planned gifts to your organization but have very limited time and resources, I recommend you implement a simple marketing plan to encourage gifts of publicly traded securities.

Why Gifts of Securities?

The Canadian government has recently passed legislation that allows donors to gift securities (stocks, bonds, mutual funds, and income trusts) to charities and pay no capital gains tax. Donors with investments that have grown in value can donate the investments and pay no tax. In fact, donors can actually make money on their gifts if the charitable tax credit exceeds the cost of their original investment!

What’s the Potential?

It is estimated that Canadians hold a total of $1.3 trillion in securities and about half of that is capital gains. Gifts of securities are a great way for donors to give to the charity of their choice rather than the tax man. Gifts such as these have been rising steadily from $69 million in 1997 to $200 million in the year 2000. It is predicted that Canadians will give $600 million to $1 billion in securities in 2006!

How Does it Work?

Thank you to Terry Fahr for providing this RBC Dominion Securities Bulletin Wealth Management Charitable Donation of Securities August 17, 2006

The net effect for taxpayers in all tax brackets is that the portion of the charitable donation in excess of the first $200 will result in a tax savings approximately equal to the top marginal tax rate.

The following table summarizes the highest marginal tax rates for the provinces for 2006:

Province	Highest Marginal Tax Rate
British Columbia	43.7%
Alberta	39.0%
Saskatchewan	44.0%
Manitoba	46.4%
Ontario	46.4%
Quebec	48.2%
New Brunswick	46.8%
Prince Edward Island	47.4%
Nova Scotia	48.3%
Newfoundland and Labrador	48.6%
Yukon	42.4%
Northwest Territories	43.1%
Nunavut	40.5%

Combining the Elimination of the Capital Gain and the Donations Tax Credit

When you donate a security with accrued capital gains, you benefit from the elimination of the capital gain plus the donation tax credit. The combined tax savings can be quite impressive. The following example illustrates this point by comparing two alternatives for donating securities with a FMV of $50,000 and an Adjusted Cost Base (ACB) of zero.

Sell shares and donate cash		Donate shares directly
FMV of donation (a)	$50,000	$50,000
Adjusted cost base	0	0
Capital gain	50,000	50,000
Taxable capital gain	25,000	0
Tax on capital gain @46% (b)	11,500	0
Tax savings from donation tax credit (c)	23,000	23,000
Total cost of donation = (a) + (b) – (c)	38,500	27,000

The two examples above demonstrate that there is a tax savings to be realized by donating publicly traded securities with appreciated gains compared to first selling the publicly traded securities and then donating the proceeds. In the above example, a savings of $11,500 ($38,500 – $27,000) would be realized by choosing to donate the appreciated property instead of selling it and donating the proceeds. The difference is a direct result of the eliminated capital gains on the donated securities.

Other Strategies to Maximize the Tax Benefit of Donations

Several strategies may be combined with the elimination of the capital gains on donated securities to enhance the tax benefits.

DONATE SHARES TO ELIMINATE TAX ON SALE OF SECURITIES

If you are considering selling securities with an accrued capital gain, then you would trigger a tax liability on the taxable capital gain. Donating the securities may be one alternative to eliminating the taxable capital gain. However, you may not wish to donate all the securities since you may want to reinvest the proceeds or use them for lifestyle expenses. In this case, you may want to donate a portion of your securities and sell the remaining portion. As a result, the donation tax credit on the portion of the securities that you donate can reduce the tax liability on the capital gain triggered on the disposition of the remaining portion (i.e. portion not donated). This begs the question, what portion of my securities do I need to donate so that the tax on the securities that I sell will be eliminated? The following formula should be used in order to calculate the FMV of the shares to be donated in order to eliminate the tax on the sale of the securities that you retain:

FMV of the Donated Securities = (FMV)(FMV – ACB)
                                                         (3FMV – ACB)

Here is an example to illustrate assuming a FMV of securities of $50,000 with a zero ACB:

FMV of the Donated Securities = ($50,000) x ($50,000 - $0)

(3 x $50,000 - $0)

FMV of the Donated Securities = $16,667

Thanks again to Terry Fahr of RBC Dominion Securities for these examples, for more information visit http://www.terryfahr.com/

A Simple Marketing Plan

As with all marketing messages, repetition is important. In order to reinforce the message of the advantages of gifts of securities, charities need to expose donors to the idea many times over the course of several months. December is traditionally the time when most gifts of securities are made as that is the time that many investors tidy up their portfolios and get rid of underperforming securities and use these tax losses to offset realized gains on highly appreciated securities. The last day for annual “tax loss selling” is near the end of December. Investors will often use this time to consider a charitable gift of securities. To sum up, timing and repetition of the message are very important in successfully promoting gifts of securities to your organization.  >> Read More

Another Way to Give