Why Gift Appreciated Marketable Securities? It Just Makes “Cents”! Linda Argalgi CPA, Philanthropic Advisor February 11, 2024 709 Did you know that one of the easiest and most effective assets to donate are appreciated marketable securities (publicly traded stocks, bonds, and mutual funds)? In Canada, when an individual or corporation sells marketable securities, this results in either a capital gain or capital loss. In the case of a gain, 50% is taxable. To incentivize giving, an exemption exists which eliminates the tax. Thus a taxpayer who chooses to donate marketable securities is not required to pay tax on the appreciated capital gain! Let’s look at an example: suppose John wants to make a donation to his favorite charity of $100,000. He owns shares of Public Company X with an adjusted cost base of $50,000 and a fair market value of $100,000. If John were to instruct his broker to sell these to generate cash for giving, he would have capital gains tax of $12,500 to pay[1]. If John were to instead donate these shares to his fund at the JCF, he saves the tax of $12,500. In either case, the charity will receive the same amount of funds ($100,000) and John would get a donation receipt of $100,000[2] (worth approximately $50,000 of tax savings) which he can use to offset other tax in the year of donation and the five following tax years. In essence, a $100,000 gift of marketable securities costs John $50,000 versus a sale of marketable securities to fund a donation which costs $62,500. Let’s compare the two alternatives side-by-side: The difference of the cost in donations in the two scenarios is a direct result of the capital gains tax saved by donating the shares as opposed to selling them ($12,500). Now, John’s fund at the JCF has $100,000 that he can grant to any Canadian registered charity of his choice, either now or in the future! When to make a gift of appreciated marketable securities? It makes sense to donate marketable securities that have an accrued gain. These gifts can be made either in a donor’s lifetime or as part of their will. In the case of a will, the estate is considered to have made the donation at the time the property was transferred to the charity (therefore, the receipt will be based on the value on the date the charity receives the property). Generally, the estate can then either allocate the donation to the tax year of the estate in which the donation was made, to a previous tax year of the estate, or to the last or next-to-last tax year of the donor. The receipt can also be carried forward up to five years, to be claimed by the estate. It is important to consider one’s income and tax situation when determining how much, and when, to gift. One should take care in considering the proposed changes to the Alternative Minimum Tax regime, which, if enacted, may come into force retroactive to January 1, 2024, and may affect large personal donations of appreciated marketable securities. It is important to consider that the basic personal exemption when computing AMT has increased from $40,000 to $173,000 – meaning that many gifts of marketable securities may not be affected by these proposals at all. In any case, we urge donors to consider this in their planning (along with other potential tax considerations specific to their particular situations) and discuss with their advisors. Benefits of donation of appreciated marketable security = No tax on capital gain + Donation tax credit Donations of marketable securities held by corporations provide an added benefit. The corporation is exempt from tax on the capital gain and receives a donation receipt deductible against income (as described above). In addition, the complete gain not taxed (i.e., 100% of the gain) goes into a corporation’s capital dividend account and can be paid out to shareholders tax-free. Gifts of marketable securities by a corporation are therefore an excellent tool to reduce the value of corporations facing estate taxation. The corporation’s value is reduced by the gift, and the capital dividend account created also reduces the value of the corporation, while still adding value to the shareholders and to charities – that’s Smart Philanthropy® For more information or to contact a Philanthropic Advisor, email us at [email protected] or call us at (514) 345-6414. [1] For simplicity, assuming John is taxable at a combined federal and provincial tax rate of approximately 50%.[2] Based on the value of the securities at closing.
