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Gifts of Securities and A Simple Marketing Plan
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 charitable 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. Charitable donations 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 gifts of 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
This publication is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy.
This article is for information purposes only. Please consult with a professional advisor before taking any action based on information in this article
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 differe nce 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, charity organizations 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 charitable gifts of securities to your non profit organization or NGO.
Step 1
Meet with your organization’s investment advisor to make certain that the advisor is set up and prepared to receive gifts of securities on your behalf. The advisor must agree to advise you as soon as any security is received into your charity organization’s account. The advisor should be aware that the securities will need to be valued as of the close of the market on the day the securities are received into the account. Your non profit organization’s authorized staff person should give the advisor the verbal instruction to sell the securities as soon as possible and follow this verbal instruction with a written fax or email (a fax with signature is preferred).
The donor should be contacted and thanked appropriately and advised of the value of the charitable gift (this is the value of the securities as of the close of the market on the day the securities are received into the charity’s account, not the amount of funds raised through the sale of the securities).
Note: Your organization will pay the sales commission. Many charities negotiate a special commission rate with their investment advisor.
Step 2
Your charity organization needs to develop a list of donors that may consider making a gift of securities. This target group will differ from the usual prospective charitable donation individual as they are often younger (age 40 to 65) and are still in the acquisition stage of their life but have reached a point where their income is greater than their needs. They are generally not retired. They are often donors who have a history of making larger, regular (annual) gifts.
Wealthy older donors should not be overlooked if they are known to have substantial investment portfolios and/or may be asset rich but cash poor.
Step 3
Your organization should develop a short message to donors that alerts them to the concept of giving securities instead of cash (or as well as giving cash). This message should indicate that there are new tax incentives for making such charity gifts. The message can be placed in all publications and other written material that is sent out from your office over several months. These can include:
- Direct mail pieces
- Donation receipts
- Annual report
- Newsletters
In addition, select newsletters should also contain a feature article that provides a real life example of a donor who has made a gift of securities. The article should give a personal history of the donor (with the donor’s permission of course) as this is always interesting to the reader and helps other donors identify with the individual and their circumstance. The reasons why the charitable gift was made, how the gift will be used and a general description of method of charitable giving should also be included in the article.
Step 4
A solicitation letter should be sent to the selected list of potential donors (see the following sample letter to potential donors) by mid October. This letter contains important instructions for the donor on how to transfer gifts of securities electronically. A second follow up letter should be sent by late November, early December.
Note: For more information on Gift Acceptance Policies for gifts of securities, see the Policies section of the Toolkit
Step 5
Your Planned Giving Committee and /or staff can develop a target list of professional advisors to meet with and discuss the potential for their clients to make charitable gifts of securities to your charity. Many investment professionals are interested in becoming involved with charitable organizations (for reputation and business reasons) and will take time to meet or talk with your non profit organization representatives to hear about the good work you do and to find ways to lend support.
Note: See the Networking section of the Toolkit for more information.
