People who own stocks, bonds or mutual funds are pleased to learn that their investments have increased. Unfortunately, when such an investment is converted to cash the realized capital gain is taxable. You can decrease the financial impact this will have by donating your publicly listed security directly to a charitable organization. In May 2006, the Federal government eliminated the capital gains tax on gifts of securities to registered charitable organizations.
Consider the following example:
Making a gift of $10,000 in stock: Mr. M.S. Donor purchased ABC Company stock some years ago for $2,000. The current Fair Market Value (FMV) is $10,000 (adjusted cost base, ACB). When looking at his stock portfolio, he is considering giving his ABC Company stocks to the MS Society as a legacy gift. His combined federal and provincial tax rate and charitable tax credit are both 45%. Here is an example of the real cost of giving the stock instead of selling it.
Option 1 — Sell the stock, then make a gift
Amount of gift
$10,000
Total gain (FMV-ACB) ($10,000-$2,000)
$8,000
Taxable gain (50% x $8,000)
$4,000
Tax on gain (45% x $4,000)
$1,800
Tax credit (45% x $10,000)
$4,500
Net credit (tax credit – tax on gain)
$2,700
Option 2 – Donate the stock “in kind”
Amount of gift
$10,000
Total gain (FMV-ACB) ($10,000-$2,000)
$8,000
Taxable gain (0% x $8,000)
$0
Tax on gain (0% x $4,000)
$0
Tax credit (45% x $10,000)
$4,500
Net credit (tax credit – tax on gain)
$4,500
Net advantage of donating stock “in kind”
($4,500-$2,700)
$1,800
Tax savings are $1,800 more if Mr. M.S. Donor gives the stock instead of selling the stock and giving the cash proceeds.
