Canadian tax laws are structured to encourage philanthropy, and for many donors, an outright gift of cash is simple and most attractive. Our tax laws offer significant benefits to donations of securities to a registered charity and it is surprising that donors are not as familiar with the benefits of this approach. If you are considering making a gift to an arts organization and intend to use a security to raise the funds, it is far more tax effective to gift the security to the charity, as opposed to selling the asset and then donating the cash equivalent.
Change in Tax Laws
In 2006, the Federal budget eliminated the taxation of capital gains arising from donations of listed securities to a public charity or private foundation. The exemption applies to donations of publicly traded securities (stocks, bonds, mutual fund units which are publicly traded). As a taxpayer, you receive a charitable receipt equivalent to the fair market value (closing price on the day the security is received by the charity from you/your broker). The tax treatment works in this way:
| Sell shares and then donate cash | Donate shares directly to charity | |
| Fair market value | $10,000 | $10,000 |
| Your tax cost (ACB) | $2,000 | $2,000 |
| Capital gain | $8,000 | $8,000 |
| Taxable capital gain (50%) | $4,000 | $4,000 |
| Tax credit on donation (46%) | $4,600 | $4,600 |
| Tax on capital gain (46%) | $1,840 | $0 |
| Net tax saving | $2,760 | $4,600 |
The total benefit to you of donating $10,000 of securities that have a capital gain in contrast to an equivalent gift of cash is $1,840. If you sold the asset, and then donated cash, you first have to pay tax on the capital gain. Making the donation of the security directly to the charity results in a charitable receipt of $10,000, and you pay no capital gains tax. You end up with a tax credit of $4,600 which is $1,840 more than had you sold the security and then made a cash donation. It is much more tax efficient.
Every individual’s situation will be different and this example is very general to illustrate the benefits. If you aren’t familiar with the concept, we recommend you speak with your financial advisor as well as staff at the organization you wish to benefit for more detailed information. Canada’s tax laws continue to evolve and the charitable sector is working with the Canada Revenue Agency to expand this concept to other types of assets such as private company shares and real estate.