- Why donating stocks, and other securities, is a more tax-efficient way to give
- How easy it can be to donate securities to your favourite charities
- 5 giving tips for making the most of your donations
$1.90 a day—over 1.85 billion people lived on less than that just 27 years ago. Try watching the 6 o’clock news, or scrolling your Facebook feed without a sense that the world is spiralling downwards—global poverty, climate change, civil unrest, the list goes on. But before you start seeing the world as half empty, consider this: 702 million people lived on less than $1.90 as of 2015. It’s unacceptably high, but it’s progress.
In many ways, the world is becoming a better place to live. Global poverty has halved, 195 nations signed the Paris climate deal, even the Giant panda has fallen from the endangered list—all this, and more, in thirty years. What’s behind this movement? Two words, compassionate action. Humans have a collective concern for one another’s struggles and we express it many ways; volunteering abroad, giving blood, raising awareness, even donating stocks to charity.
Yes, even donating stocks to registered charities. Some consider Wall Street a dog-eat-dog world, but when it comes to philanthropy, donating through the stock market can be the most effective. That’s because when you donate shares to your favourite registered charities not only are you investing in a better world, you’re also able to give more, and lower your tax bill.
It's not a tax loophole, it's encouraged giving
A capital gain occurs when you sell a security at a higher price from what it originally cost you, think of it as a profit. That capital gain, like most forms of earnings, is subject to tax. But thanks to tax policy changes in 2006, donations of publicly traded securities (stocks, mutual funds, bonds, etc.) to registered charities are exempt from capital gains taxes. It’s not a loophole in the tax code, it’s the government encouraging Canadians to give to those less fortunate.
Donating shares to charity is a win-win
Philanthropy heals the world, and it also feels great. Brain scans tell us as much. But there are two particular benefits to donating securities over cash, credit, or cheque that leaves everyone a winner.
Charities get more funding
Benjamin Franklin, a father of American philanthropy, said nothing is certain but death and taxes. When donating securities, that statement’s only half true because capital gains tax does not apply. It doesn’t apply to you when you donate, or to the charities when they decide to sell.
If instead of donating securities, you sell them and donate the cash proceeds, a piece of the donation is lost to capital gains tax. In short, donating securities in lieu of cash means giving more to the charities you support. More shelter for abandoned animals, therapy for the bereaved, beds for the homeless, more for your cause.
You lower your taxes
A charitable tax credit isn’t the main reason for your giving, but it’s a welcome kickback. If you donate securities directly to a registered charity, they’ll issue you a tax receipt, and the Canada Revenue Agency will give you a tax credit for the fair market value of the gift at the time of donation (calculate your charitable tax credit). Whereas, if you sell your appreciated securities first, triggering capital gains taxes, and then donate the remaining cash, your donation is smaller and so is your tax receipt.
Imagine you purchased $2,000 worth of stock in company XYZ and years later these same investments have grown to $10,000. You’re now thinking of writing a cheque for the local animal shelter. What’s the most efficient way? Below is a side-by-side comparison of giving appreciated shares versus selling shares and donating the cash.
|Sell securities and donate cash||Donate securities to the charity|
|Current Market Value of Securities||$10,000||$10,000|
|Original Cost of Securities||$2,000||$2,000|
|Capital Gains Tax @ 46%1||$1,840||$0|
|Donation amount after-tax||$8,160||$10,000|
|Your charitable tax credit1||$3,753||$4,600|
1These are general figures for the purpose of illustration. This assumes a 46% marginal tax rate; varies by province
In this example, donating your securities directly to the animal shelter means the shelter receives an extra $1,840 and you collect an additional $847 in tax credits. When you donate to charities, everyone wins.
How to donate your stocks
You’ll want to contact your charity of choice as each will have a slightly different process. Established charities should have a process for securities donations, but many of the smaller organizations don’t have the time or resources to handle such gifts. Fortunately, CanadaHelps.org, a charity for charities, is here to help.
CanadaHelps is the largest processor of online securities and mutual fund donations in Canada and helps you donate to over 85,000 registered Canadian charities of all sizes and causes. They guide you through the giving process, accept your donation, issue you a tax receipt, sell the securities, and then donate the proceeds to your chosen charities. They charge only a small administration fee, which they use to self-fund (don’t worry, you get a tax receipt for 100% of your donation).
Donate stocks with CanadaHelps.org in 3 easy steps
- Search for the charity you want to support and select Donate Securities.
- Answer a few basic questions using their online securities donation form.
- Complete the provided Letter of Direction form and send it to your financial advisor or investment firm.
5 tips for giving
Tip #1: If you’re hoping for a tax credit, be sure it’s a registered charity that you’re donating to, as only they can write tax receipts.
Tip #2: You might be eligible for the first-time donor’s super credit (more free money from the government) if you and your partner haven’t claimed a charitable tax credit in the past five years.
Tip #4: You can put a charitable donation in your partner’s name or your own, but it’s generally best for the higher-income spouse to claim the charitable tax credits. Because if they’re in a higher tax bracket, you’ll get the most back at tax time.
Tip #5: Warren Buffett said, “Giving money away is easy. Giving money away well is fiendishly difficult.” He's given away a lot of money, so we'll take his words as wisdom. Before you donate, see how efficient a charity is with donor dollars by visiting Charity Intelligence.
The last few miles are the hardest
Last time StatsCan checked, Canadians are donating over $12.8 billion a year. Donated securities represent only a small portion of this charitable giving, $6.5 billion being cash, $1.8 billion credit card, $836 million pre-authorized account deductions, and $340 million payroll deductions. But this simply means there are opportunities for Canadians to give and receive even more.
The 6 o’clock news might be grim, but beyond the negative headlines lies a far more encouraging story. There’s still much to be improved and the final stretch is always the hardest. Nonetheless, humanity has shown we’re up for the challenge, and you can continue this momentum one donated stock at a time.
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This article and any illustrations provided are for informational purposes only and should not be used or construed as financial or tax advice. Capital gains taxes may apply under certain circumstances. We encourage you to seek professional advice before deciding upon any donation to charity.