I have been fortunate in my life to build some wealth and would like to make a significant charitable donation before the end of the year. What is the most effective way to donate sums near or in the 6 figures?
Asked by Anonymous, Montreal, QC
As the year end approaches, many people are thinking about giving donations whether at the door, online or by credit card. When you give, you get a donation receipt for the value of your gift. You can then use that receipt to claim a tax credit. However, if you are the owner of appreciated securities, consider giving those first, especially when donating as large a sum as you mentioned. Not only will you get the tax credit, you will eliminate any capital gains owing on the sale of those assets. But remember, to receive this additional tax credit, the charity must receive the securities in-kind. Do NOT sell the securities and then transfer the cash, as this will trigger the capital gain.
Here is an example comparing giving cash versus giving securities:
Susan lives in Manitoba. She contributes some of her Royal Bank stock to the United Way (a public charity). Her Royal Bank stock has a current market value of $100,000 and a cost base of $10,000 (what she originally invested), giving her an unrealized capital gain of $90,000. Her net income is $160,000 per year, and her other charitable gifts exceed $200.
The maximum contribution Susan can claim in the year of the gift would be: Net income from all sources of $160,000 x 75% = $120,000.
|Donate Cash||Donate Stock In-Kind|
|Taxable gain (50%)||$45,000||0|
|Tax on gain (46.4% x $45,000)||$20,880||0|
|Donation tax credit (assuming combined rate of 46.4%)||$46,400||$46,400|
|Net tax savings (Tax CR - Tax on Gain)||$25,520||$46,400|
|After tax cost of donating stock vs. cash (FMV - Net tax savings)||$74,480||$53,600|
The result: If Susan sold the stock, it would cost her $74,480 to make a $100,000 gift, but if she gives the stock in kind, she instead has a cost savings of $20,880 ($74,480 - $53,600). So Susan is well within her annual donation limit.