Recently Reader M provided some excellent insight on early withdrawal strategies. At the end of the blog post, I mentioned that charitable giving is important, particularly with what is going on in today’s world. After reading my comment, Reader M reached out again and asked if I know anything about donating securities to charity. According to Reader M, this is more tax efficient than donating cash. I have always wondered how to donate stocks to charity in Canada but never looked into it. So I was very intrigued to learn more.
Once again, with Reader M’s agreement, he has shared some personal experience with how to donate securities and stocks to charity in Canada.
How to donate securities to charity
I couldn’t agree more with your sentiment on charitable giving. Donating time and money to charities to try to make the world a better place is something we should all do.
But I would also add, since you write for a reader base that is active in investing, that people should also consider whether donations of securities, such as shares or trust units, might figure well into their budgeting and planned giving.
In case you haven’t tried this out before yourself, I’m happy to share some of my experience with it and my understanding, as far as it goes. But first comes the disclaimer: I am not a tax professional and not qualified to provide tax advice to others about their situations.
So if people are interested in following up on this and considering donating some securities, they should check into it themselves, to ensure it is appropriate for their individual circumstances and obtain relevant confirmations, possibly including consulting a tax professional, if they find they have questions that go beyond the information easily available online. That said, there is quite a lot of information available about this online, including directly from the CRA.
With that out of the way, I’d better get to the hook on this reasonably quickly. If you have donated cash in amounts greater than $25 before, you are familiar with the fact that any charitable organizations you donate to will provide you with a tax receipt.
There are nice things about charitable giving and one of the ones I enjoy are those receipts and how they make it a little bit of a better deal for the donor, by easing the tax burden associated with having earned the funds that are given away.
Tawcan: Donating to charities is a great way to gain federal tax credits when you file your income tax. When the total donation amount is under $200 you get a 15% tax credit. For a donation amount over $200, you get a 29% tax credit.
Here is the hook: if you are willing to do the little bit of planning and paperwork associated with donating securities, our tax system can make it an even better deal for you, for the receiving charity, or for both, depending on how you want to divide up the additional benefit. Interested?
Now, just as the usual cash donation tax receipt doesn’t turn charitable giving into a money-maker for the donor, the securities donation enhancement doesn’t go that far either. Giving is still giving and you end up with less in material terms than before you gave it away.
But donating securities can be significantly more efficient than donating cash when the additional tax benefit is taken into account.
Why donating securities to charity can be more tax efficient than donating cash
To make this work to the best effect, you need to be holding, in a taxable account, securities with a significant embedded capital gain. Any stock position (or portion thereof) that has increased significantly in value since your purchase is a good candidate for this strategy. It doesn’t have to be a double or a triple, but the greater the embedded increase in value, the greater the benefit to be derived by giving it (or some of it) away.
This kind of charitable giving can be incorporated into one’s periodic rebalancing strategy, to help trim back a position that has become too large relative to the other holdings in the account. At the same time, if you don’t really want to part with those shares that have done so well for you and you want to ‘let your winners run,’ you can do that too because you can buy back the position (or some portion of it) as soon as the day after the donated shares have disappeared from your account – there is no superficial loss here so no need to wait 30+ days before repurchase.
Furthermore, the effect can be to recreate your pre-donation position but with a higher adjusted cost base, taking into account the new purchase price. The way I do it is to donate specific securities instead of making a cash donation that I would otherwise be making; which means that the cash I would otherwise be donating will be available to contribute back to my taxable account. I can either put it back into the donated security or ‘rebalance’ by using it to invest in something else that I’d like to have more of. But let’s not digress too far along this line.
If re-buying the same security, just don’t jump the gun on making the repurchase too soon, or you’ll increase the cost base of the shares before giving them away, which reduces the effectiveness of the strategy. For this purpose you want to actually see that the donated shares have been removed from your account first, and then go about replacing them. That timing is important!
I begin my securities donation planning by selecting my taxable account holding with the biggest percentage embedded capital gain. For me, in 2020 this was Lightspeed (LSPD.TO). I bought my taxable account LSPD holding for an average cost of about $20 per share. In December 2020, at the time my charitable donation was completed, LSPD was worth about $85 per share. A nice return!
I decided to give away 100 shares, which was just a portion of the position I was holding. But still, a value of $8,500 against a $2,000 cost base represents a significant taxable capital gain so, if I had sold the shares, I’d be paying a good chunk to the government in the deal. Instead, by giving away the shares to registered charities (I divided it among several), I received a tax receipt for the full value of $8,500, the charities received a total of $8,500 in value, and the capital gain liability – well, it simply disappeared. Poof! Nice, eh? But that’s exactly how it works.
Tawcan: donating securities to charities might be something reader B might want to consider as a way to further lowering his income tax, considering he’s collecting over $360k in dividend income.
Suppose instead that I had decided to donate cash to the charities using the same asset base. Leave aside that I would need to sell it and there would be a small transaction fee on the sale. The main drawback is that I would have to allow for the capital gains tax I’d be incurring at my top marginal rate.
So let’s say I would hold back about 40% of half of the $6,500 gain, or about $1,300, so I could pay the tax that will be due. That leaves me with about $7,200 to pass along to the charities, for which they’ll provide me tax receipts for a total of $7,200 in donations. That is the relevant alternative and either way I am down a holding that was worth $8,500 on the disposition.
So as far as the decision to donate securities is concerned: which way sounds better to you?
The mechanics of making a securities donation
I’ve already been through the capital gains tax advantage I was able to obtain by opting to go the securities donation route for my charitable donations. So it would probably be worth covering the mechanics of making a securities donation, the importance of doing a little extra planning, and of initiating the donation a little earlier than one might if one were taking action on New Year’s Eve to squeeze a last minute cash donation into the calendar year.
First the mechanics. I’ll start by saying that the first time I tried donating securities I simply donated a single allotment of shares to a single charitable foundation.
There was a little paperwork involved: one form from my discount brokerage and one form from the receiving brokerage used by the charitable organization. I found my discount broker’s form on their website. My discount broker’s securities donation form (instructing them to transfer the shares out of my account) was not quite as easy to find as the forms they have for transferring holdings from other institutions into one’s account but it was there and findable with a little extra digging.
Next, I had to contact the charitable organization to get their form and their broker’s information, which was a little more work but not too bad. I filled out the forms and dropped them off at my local bank branch, which is affiliated with my discount brokerage. They forwarded the forms to my discount brokerage for me for free in their internal mail system. And that was about it really, apart from waiting to see the shares removed from my account, which took a couple of weeks and likely could take up to three or four weeks.
So one observation about this is that when you are donating shares you don’t know ahead of time what the precise value of your donation will be and you don’t know precisely when it will be completed. Unlike a cash donation, you designate the number of shares to be transferred, not the value.
What happens next is that the receiving brokerage has the shares transferred into its care and then immediately sells them, at whatever the market price of the moment is. They could be worth somewhat more than they were when you filled out the paperwork or somewhat less. Whatever they sell them for, that is the value of the tax receipt they issue you for the donation.
So if you are going to do this it requires a little bit of flexibility on your part and a predisposition not to be overly concerned about the short-term price change risk. But ultimately your tax receipt is for the full value of the shares when they are sold, including any embedded capital gain that you might otherwise have been taxed on, had you not given them away.
A few things to consider when donating securities to charity
Some planning can be important too. As I suggested above, you probably don’t want to be trying this well into December and stressing about whether it will be done in time to be this year’s tax receipt or next.
If you are going to do it, plan ahead and allow ample time for it to be completed well before the end of the year. Maybe think about doing your donations after your income taxes are filed, especially if you are looking forward to receiving a tax refund.
You probably also want to think about what to do with the cash you would otherwise be donating, if you weren’t donating securities, assuming you have access to it.
In my case, I had already set aside the amount of cash that I was intending to donate that year. So my next step was to transfer that money into my investment account, to replace the value of the shares transferred away.
I decided to immediately purchase back the same number of shares in the same company. So I simply reconstructed my former position in my portfolio, which was of course at a higher cost base than my original shares were.
The charity got its cash, I had my share position back in place, and I had escaped a good chunk of the capital gain liability that I had been sitting with prior to making the donation. It felt good!
People should keep in mind though that the significant advantage of securities donations is a tax advantage; so to obtain it one needs to be donating shares from a taxable account and shares with a significant unrealized capital gain – the bigger the better. The best shares (or ETF units, for that matter) to donate are the ones from your taxable account investment portfolio that have the greatest percentage increase in value. You wouldn’t get the tax advantage in the mix if you were donating shares from an RRSP or a TFSA or by donating shares that had not appreciated significantly in value.
An easier way to donate securities to charity in Canada
Tawcan: Hmm, Reader M, filling out multiple documents to initiate the security donation can take quite a bit of work. Is there an easier way to donate securities to charity?
I’m glad you asked!
More recently I have done my charitable securities donations through a charitable organization called Canada Helps, which has a very useful online site that is very easy to find your way onto.
I am not affiliated with them in any way and don’t really intend this as a commercial for them but I have just found their service to be very useful and convenient and I don’t mind cutting them a few bucks in the transaction to support the work they do (which is an option that appears partway through their online process).
The way it works is that Canada Helps effectively acts as the receiving brokerage for the share transfer. You do your paperwork on that side of things on the Canada Helps website instead of by contacting the individual charities to get their information. The website lets you select multiple recipients from an enormous number of charities (including all of the ones I generally give to) to designate as the end recipients.
So with Canada Helps, I can transfer them specific numbers of shares from one or more of my holdings and then instruct them to distribute the proceeds of sale to 5 or 10 or in my case to 12 different charities. And I am able to specify to give more to one and less to another among the charities I select to receive the donations. Essentially, there is a lot of freedom and flexibility with it.
Another advantage is that Canada Helps issues me a single tax receipt for the total amount, with all of the individual donations to the end recipients detailed on it. So that even makes doing my taxes easier (I’m DIY there too).
Canada Helps also provides the ability to make your donations to the end recipients anonymously or to limit the kind of personal contact information you provide them. This might give you a chance to cut down a little bit on the amount of junk mail you receive.
If anyone is interested in checking them out, I would say go take a look at their website and see what they offer. They’ll happily handle cash donations too, with the same flexibility, for anyone who is not ready to give securities donations a try yet, or for those late December just under the wire donations.
One tip though if you are going to do securities donations through Canada Helps, do the Canada Helps online paperwork first, that way you’ll have some of the information you’ll need for filling out your own brokerage’s form ready at hand.
In addition to your brokerage’s info, the Canada Helps paperwork asks for an advisor’s name and contact info. DIY investors who use discount brokers can just put their own name and contact info as the advisor. I called them about it and was told that it is very rarely used, typically only if there is some kind of problem with the paperwork, and if that happens then you’ll want to know about it and help sort it out anyway. I have now done several transactions with them and have never been called about anything.
So that’s about it Bob, as far as my experience with securities donations goes. It’s a great option for people who are a good fit for it. If you are somewhat serious about charitable donations that you’ll be making anyway, have taxable account holdings with significant embedded capital gains, are up to a little bit of extra paperwork, are willing to plan enough in advance to allow plenty of time for the transfer and sale to unfold, and are not too bound up about knowing precise donation values in advance, then you are probably a pretty good fit for it.
Summary – How to donate securities to charity in Canada
Thank you Reader M for sharing such insightful knowledge and your personal experience. It sounds like utilizing Canada Helps is an extremely effective way to donate to multiple charities and avoid having to deal with multiple donation forms.
For someone that has significant capital gains in their taxable account and looking for ways to lower their taxes, I believe donating securities to charities is way more tax effective than simply donating cash.
Early retirees may be making RRSP withdrawals and moving the money to their taxable account. Donating securities to a charity and then using the RRSP withdrawal money to buy back the same shares might be a worthwhile idea to explore. Who knows, maybe this could potentially lower the amount of taxes you have to pay and allow you to pay almost no taxes.
Dear readers, have you donated securities to charity before? I’d love to hear about your experience.