15 October, 2020 Financial Planning Wealth Management

How to Make Tax-Efficient Donations

Three people smiling while looking at a tablet.

Most people know that they can get tax credits when they make donations. 

 

But what they don’t always know is how to make the most of their hard-earned money while benefiting a charity at the same time.

 

Fortunately, there are ways to make your donation go further and benefit your recipient even more. There’s a specific way to donate large sums that results in more money to the receiving charity — and less tax for you to pay.

How can I make a donation and pay less tax?

Our recommended method to make a tax-smart donation to benefit your favourite non-profit organization is a donation of shares or securities. Since these donations are non-cash gifts, they have big tax implications.

 

These shares or securities can be mutual funds, stocks, bonds and T-bills that are listed on a prescribed stock exchange.

 

By giving shares or securities directly to your recipient — instead of liquidating them and donating the proceeds — you’ll be completely eliminating the capital gains taxes. 

How does giving this way work?

To illustrate how these gifts work, here’s an example.

 

Let’s say you have shares that you purchased at the beginning of the COVID-19 pandemic or have shares that you’ve accumulated through work.

 

For the purpose of this example, let’s say you acquired shares and paid $10,000 (the adjusted cost base, or ACB) and the shares have increased in value to $15,000 (called the market value) since you acquired them. The $5,000 growth on these shares would be considered a capital gain. With current regulations, 50% of any capital gain is included in your taxable income when you redeem the funds. 

 

One way to donate this money would be to redeem the shares for $15,000, pay the required capital gains tax and donate the proceeds to charity. In this scenario, you would receive a charitable tax receipt. 

 

But, since the elimination of the capital gains tax on securities donations in 2006, you can now make a donation of these securities without paying taxes.

 

A second, much more tax-efficient way to donate would be to donate the shares or securities directly. This way, you could declare $0 of the capital gains and pay no tax — and your charity of choice receives the benefit of your appreciated securities. But the best part? With this method of donating, you still get the charitable tax receipt!

Can you explain the process a bit more?

Normally, if you sold shares or securities, you’d be assessed a capital gains tax on the increased value of your investment over the price paid at purchase. And if you sold or liquidated your investments and then donated the cash, you’d receive the tax credit for the donation but would still have to pay tax on the profit you’d gained — money that could have gone to a cause you care about.

 

However, if you donate the securities directly to your charity of choice, you will receive a tax receipt for the full fair market value of your investment at the time of donation, paying no capital gains tax on the increase in value. Our advisors can help you with all of the paperwork — no need to go it alone.

What are the tax incentives?

When you give this way, the capital gains tax that would normally occur is included at 0% (or, otherwise, completely eliminated). With the charitable receipt you get, the tax you owe on any other income is reduced significantly. These gifts can be made during your lifetime as well as through your estate (will) — it’s completely up to you, and likely dependent on your circumstances.

 

The major benefits include:

  • Complete elimination of taxable capital gains — None of the capital gains are taxable when you donate appreciated securities — that’s a 100% reduction!
  • Donation receipt flexibility — You can elect a lower value than the market value for your donation receipt. This can be helpful for those donating through their estates, as donation limits are 100% of income in the year of death and the year prior to death.
  • Donation receipts for up to five years later — Unused donation receipts can be used for up to five years after the donation, so you can choose which year they’re claimed.

 

Let us help structure your gift for the highest tax efficiency.

If you don’t generally donate, this isn’t necessarily a reason to start. But, for those who do donate, donating shares or securities is an opportunity to give in a tax-efficient way.


If you ask us, it’s a fantastic opportunity. If you’d like to discuss your options for a cost-effective way to benefit your favourite charities, schedule a meeting with one of our advisors today.