How donating securities to charity saves you tax

September 01, 2021

You may be able to reduce your tax by donating securities directly to a registered charity. This is because charitable donations of publicly listed securities are exempt from capital gains tax on gains triggered by the gift.

This beneficial treatment can also apply to shares acquired from the exercise of employee stock options. If you acquire shares because you exercised employee stock options, any difference between the value of the shares acquired and the amount paid for the shares and the options results in a taxable employment benefit. Donating shares to a registered charity within 30 days of acquisition and in the same taxation year as the shares were acquired results in a taxable employment benefit that will be reduced to nil. Care must be taken that any other conditions related to donations of publicly traded shares, eligible charities, and stock option deductions are met.

An employee may also be allowed to deduct a portion of their taxable stock option employment benefit if the proceeds from the disposition of the securities acquired through the stock option plan are donated (instead of donating the shares acquired through the exercise of the stock option). Employees can qualify for this deduction by directing a broker or dealer who is appointed by the grantor of the option, or by an entity not dealing at arm’s length with the grantor, to sell the securities immediately and donate all or part of the proceeds of the disposition to a qualifying charity. The stock option benefit deduction will be equal to the amount that would have been deductible had the securities been donated as described above, and prorated to reflect the proportion of the proceeds that are in fact donated.

What is a qualifying security?

Investments that are eligible for this special tax treatment include:

  • shares, rights, and debt obligations (typically bonds or debentures) that are listed on a prescribed stock exchange;
  • shares of a Canadian public mutual fund corporation and units of a mutual fund trust,
  • interests in a segregated fund trust;
  • ecologically sensitive land donated to a qualified donee other than a private foundation where certain conditions are met; and
  • a bond, debenture, note, or mortgage of the Canadian federal or provincial governments.

Qualifying stock exchanges generally include the Canadian National Stock Exchange (CNSX), the TSX Venture Exchange (Tiers 1 and 2), Montreal and Toronto stock exchanges, the NEO Exchange, and most major foreign stock exchanges such as the NYSE and NASDAQ.

Items exchanged for qualifying securities, and flow-through shares

This beneficial treatment is also extended to any capital gain that is realized on the exchange of shares of the capital stock of a corporation for publicly traded securities that are in turn donated when:

  • at the time of issue and at the time of disposition, the shares of the capital stock of the corporation included a condition allowing the holder to exchange them for publicly traded securities;
  • publicly traded securities are the only consideration received on the exchange; and
  • the publicly traded securities are donated within 30 days of the exchange.

Special rules also apply to the exchange of property that is a partnership interest for publicly listed securities that are then donated, and for the donation of flow-through shares. Please contact your BDO advisor for advice in such situations.

When does it make sense to gift securities?

You only benefit from this tax measure if you gift shares that have an accrued capital gain. If your shares have not increased in value since you purchased them, you will not save any capital gains tax by donating them to a charity. You will still get a charitable donation receipt for the value of the shares, but it would be no different than donating cash.

If I donate securities, how will my taxes be reduced?

This is probably best explained by an example. Let’s assume you wish to make a gift to your favourite charity of $5,000. You are also going to dispose of the shares of a publicly traded company that you’ve held for several years. The shares were purchased several years ago for $1,000, currently worth $5,000, and therefore have an accrued capital gain of $4,000.

Let’s compare the cost of the donation to you in two scenarios:

1. You sell the shares and donate $5,000 in cash.

2. You donate the shares directly to the charity.

You will have a disposition of your shares for tax purposes at their fair market value of $5,000 under both scenarios. Assuming your marginal tax rate is 53.53% (this is the top tax rate for an Ontario resident in 2021), you would have to pay the following tax:

Tax on Capital Gain
  Sell Shares /
Donate Cash
Donate Shares
to Charity
Proceeds of
Disposition
$5,000 $5,000
Cost of Shares   (1,000)   (1,000)
Capital Gain $4,000 $4,000
Taxable Portion of Gain @ 50% $2,000  
         @   0%          $0
Tax @ 53.53%    $1,071        $0
 

The tax difference between the two scenarios comes directly because of the tax on capital gains saved by donating the shares to charity.

You will still get a tax break based on the value of your donation under both scenarios. Assuming the taxpayer has $200 of other charitable donations, the tax savings from the gift will also be calculated at 53.53%. The tax break will be 53.53% of $5,000, or $2,676, and your $5,000 donation will cost you the following:

Total Cost of Donation to You
  Sell Shares /
Donate Cash
Donate Shares
to Charity
Amount of
Donation
$5,000 $5,000
Add: Tax on
Capital Gain
1,071 0
Less: Value of
Donation Tax Credit
(2,676) (2,676)
Cost of Donation
to You
$3,394. $2,324

You will have saved $1,071 in tax on your capital gain by gifting your shares directly to your favourite charity instead of selling the shares. Generally, if you are going to make a donation and you are also selling securities, you should consider donating the securities to the charity instead.

How will the charity benefit from my gift?

Many charities actively pursue gifts of securities from donors. They work with brokerage firms to turn your gift into cash. The charity will end up with the full amount of your donation to use in their programs whether you give cash or securities.

Contact your BDO advisor or reach out to us here if you have any questions on how to donate securities to your favourite charity.

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